Filed 5/7/13
                           CERTIFIED FOR PUBLICATION

               IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA

                            SECOND APPELLATE DISTRICT

                                    DIVISION THREE



CALIFORNIA STATE TEACHERS’                           B225245
RETIREMENT SYSTEM,
                                                    (Los Angeles County
        Plaintiff and Appellant,                    Super. Ct. No. BC389742)

        v.

COUNTY OF LOS ANGELES,

        Defendant and Respondent.




        APPEAL from a judgment of the Superior Court of Los Angeles County,
Richard E. Rico, Judge. Reversed and remanded with directions.
        Moore & Associates, Kevin J. Moore for Plaintiff and Appellant.
        Pillsbury Winthrop Shaw Pittman, Craig A. Becker, for Amicus Curiae California
Public Employees’ Retirement System in support of Plaintiff and Appellant.
        Randy Ferris, Chief Counsel, Robert W. Lambert, Assistant Chief Counsel, Kiren
Kaur Chohan and Crystal Ying Yu, Tax Counsel, for Amicus Curiae California State
Board of Equalization in support of Plaintiff and Appellant.
        Andrea Sheridan Ordin and John F. Krattli, County Counsel, Albert Ramseyer,
Principal Deputy County Counsel, for Defendant and Respondent.

                              _________________________
       Plaintiff and appellant California State Teachers’ Retirement System (STRS),
a public entity, appeals a judgment following a grant of summary judgment in favor of
defendant and respondent County of Los Angeles (the County) on a complaint for refund
of property taxes.
       STRS is authorized to invest in real estate. Because STRS is a unit of state
government, property it owns is exempt from property taxation. (Cal. Const., art. XIII,
§ 3(a). However, the private lessees of real property owned by STRS are subject to
property tax based on the lessees’ possessory interest. The essential issue raised on
appeal is the constitutionality of Government Code section 7510, subdivision (b)(1),
insofar as it prescribes the method for determining the assessed value of a private lessee’s
leasehold interest in real property owned by a state public retirement system, when the
lessee has leased only a portion of the property. 1




1
       Government Code section 7510 states in pertinent part at subdivision (b)(1):
“(b)(1) Whenever a state public retirement system, which has invested assets in real
property and improvements thereon for business or residential purposes for the
production of income, leases the property, the lease shall provide, pursuant to Section
107.6 of the Revenue and Taxation Code, that the lessee’s possessory interest may be
subject to property taxation and that the party in whom the possessory interest is vested
may be subject to the payment of property taxes levied on that interest. The lease shall
also provide that the full cash value, as defined in Sections 110 and 110.1 of the Revenue
and Taxation Code, of the possessory interest upon which property taxes will be based
shall equal the greater of (A) the full cash value of the possessory interest, or (B), if the
lessee has leased less than all of the property, the lessee’s allocable share of the full cash
value of the property that would have been enrolled if the property had been subject to
property tax upon acquisition by the state public retirement system. The full cash value
as provided for pursuant to either (A) or (B) of the preceding sentence shall reflect the
anticipated term of possession if, on the lien date described in Section 2192 of the
Revenue and Taxation Code, that term is expected to terminate prior to the end of the
next succeeding fiscal year. The lessee’s allocable share shall, subject to the preceding
sentence, be the lessee’s leasable square feet divided by the total leasable square feet of
the property.” (Italics added.)
       All further statutory references are to the Government Code, unless otherwise
specified.
                                              2
       Section 7510, subdivision (b)(1) provides where, as here, a lessee has leased less
than all of the property, the lessee’s tax is based on “the lessee’s allocable share of the
full cash value of the property that would have been enrolled if the property had been
subject to property tax upon acquisition by the state public retirement system,” with the
lessee’s allocable share based on the lessee’s percentage of the total leasable square feet
of the property. (Ibid., italics added.) In other words, under the statute the lessee’s tax is
based on the full cash value of the property, even though the lessee holds only a
possessory interest in the property.
       We conclude there are two constitutional defects in the statute’s valuation
methodology. Section 7510, subdivision (b)(1), is facially unconstitutional insofar as it
bases a lessee’s assessment on the lessee’s allocable share of the full cash value of the
property, based on the lessee’s percentage of the total leasable square feet of the property.
Under the statute, the exempt remainder or reversionary interest, belonging to the public
retirement system owner, is included in the assessment of the lessee’s possessory interest.
Consequently, the statute violates the prohibition against assessing property taxes on
publicly owned real property (Cal. Const., art. XIII, §3(a)), as well as the prohibition on
assessing property in excess of its fair market value. (Cal. Const., art. XIII, § 1.)
       Therefore, the judgment will be reversed and the matter remanded for further
proceedings.
                  FACTUAL AND PROCEDURAL BACKGROUND
       1. The subject property and the assessment.
       In 1984, STRS, a public retirement system, purchased the subject real property,
an office building at 924 Westwood Boulevard in Los Angeles (hereafter, the building)
for $28.5 million. The building has approximately 143,377 in net rentable square feet.
STRS owns the building in fee simple.
       Because STRS is a public entity, its interest in the building is exempt from
property taxation. (Cal. Const., art. XIII, § 3(a).) However, a private lessee of publicly
owned property is subject to property taxation on its “possessory interest” in the property.


                                              3
(§ 7510, subd. (b)(1).) Therefore, STRS’s lessees in the building were subject to
property tax.
       In January 1998, Dong Eil Kim and Chang Nim Kim, doing business as Mail
Boxes, Etc. (collectively, Kim) entered into a five-year lease with STRS for a retail space
consisting of 1,280 square feet on the ground floor of the building. In a 2003 amendment
to the lease, the parties extended the lease for an additional five years, to terminate
February 4, 2008.
       The original lease required Kim to pay, “[i]n addition to Base Rent, . . . Tenant’s
Proportionate Share of Operating Costs for each calendar year to compensate for changes
in Landlord’s Operating Costs.” The original lease obligated Kim to pay all property
taxes imposed in connection with the leasehold.
       A 2003 amendment to Kim’s lease provided: “5. Tenant shall continue to be
responsible for its NNN charges under the lease, except that the real estate tax component
shall be billed directly to Tenant, rather than as a percentage of total taxes paid for the
building.”2
       For the tax year July 1, 2006 through June 30, 2007, the County assessed the value
of Kim’s leasehold interest at $418,618. Based on the assessed value, the County levied
a property tax against Kim in the amount of $4,983.34. STRS paid the County the
amount of the tax owed by Kim.
       2. Application for a reduced assessment and refund.
       STRS and Kim then filed an application with the County’s Assessment Appeals
Board (Board) to reduce the assessed value of Kim’s leasehold interest and for a refund.
The application identified STRS as an “affected party” in the matter, and indicated the
application was being presented as a “test case” to determine the appropriate valuation
methodology for the various buildings STRS owns in Los Angeles County.



2
        An NNN, or triple net lease, is one that passes on to the tenant all the maintenance
and operating costs incurred for the leased property. (Sierra View Local Health Care
Dist. v. Sierra View Medical Plaza Associates (2005) 126 Cal.App.4th 478, 485, fn. 4.)
                                              4
       The application by STRS and Kim challenged the constitutionality of section
7510, and further argued that even assuming the statute were constitutional, its provisions
had been misinterpreted and misapplied by the Assessor.
       The Board denied the application. With respect to the constitutionality of the
pertinent statute, the Board ruled that, as a quasi-judicial body, it lacked jurisdiction to
declare the statute unconstitutional. The Board further found the Assessor did not
misinterpret or misapply the provisions of section 7510, subdivision (b).
       3. Trial court proceedings.
              a. Pleadings.
       On April 25, 2008, STRS and Kim (collectively, plaintiffs) filed a verified
complaint for refund of property taxes. They alleged in pertinent part: “The valuation
methodology that the County Assessor used in making this assessment was unsound and
did not properly apply the governing provisions of the California Constitution, statutes,
administrative regulations and assessment procedures in evaluating [Kim’s] possessory
interest under the Lease (‘the Possessory Interest’). Among other things . . . , ‘assessing
property tax on the full fee interest in the property rather than just the leasehold interest in
the property’ results in a differential taxation of real property that violates Article XXX,
Section I of the California Constitution because the value taxed is greater than the fair
market value of the lessee’s possessory interest alone.”
       The complaint sought a judicial determination that: (1) section 7510 is void and
unenforceable in that it violates the provisions of articles XIII and XIIIA of the California
Constitution; (2) the method of valuation used by the County Assessor and by the Board
was unsound and resulted in an improper and arbitrary value for Kim’s possessory
interest in the premises; and (3) the common areas of the building do not constitute
possessory interests subject to taxation because the common areas do not satisfy the
requirements of possession, independence and exclusivity under the applicable law.
Plaintiffs requested a refund of taxes paid and that the matter be remanded to the Board
so that the County may value the possessory interest in a manner consistent with the trial
court’s determination.

                                               5
       b. Summary judgment papers; undisputed facts.
       The County and STRS presented the case to the trial court by way of cross-
motions for summary judgment. Kim was not a participant in the summary judgment
proceedings. The papers reflect the pertinent facts are largely undisputed, to wit:
       The County determined the base year value of the building based upon STRS’s fee
simple interest in the entire property. The base year was 1985 and the base year value
was STRS’s purchase price of $28.5 million. The County trended the base year value
forward a maximum of two percent per year from 1985 to 2006, pursuant to Proposition
13 (Cal. Const., art. XIIIa, § 2(b)), and the cumulative upward adjustment from 1985 to
2006 was 48.642 percent. Thus, for the relevant tax year commencing July 1, 2006, the
County assessed the value of the building at $42,362,834. Of that sum, the County
allocated $29,744,119 to the office space and the remaining $12,618,715 to the retail
space in the building. The County established Kim’s percentage of the total retail
rentable square footage by taking Kim’s square footage and dividing it by the total retail
rentable square footage. The County determined Kim’s premises represented 3.317437
percent of the total retail rentable square footage. Applying that percentage to the
$12,618,715 value of the retail space in the building, the County assessed the value of
Kim’s leasehold interest at $418,618. Based on the assessed value, the County levied
property tax against Kim in the amount of $4,983.34.
       In its moving papers, the County asserted section 7510 is lawful and valid.
       STRS, in turn, argued the valuation methodology prescribed by section 7510,
subdivision (b)(1), violates the California Constitution because: (1) it does not value
taxable possessory interests in accordance with their fair market value; (2) it taxes
property exempt from taxation; (3) its classification of taxpayers violates equal
protection; and (4) its valuation methodology is not uniform in its application to all
similarly situated taxpayers. STRS further contended the County violated the California
Constitution in its application of section 7510, subdivision (b)(1) to Kim.




                                             6
                 c. Trial court’s ruling.
          On January 14, 2010, the motions for summary judgment came on for hearing and
were taken under submission. Thereafter, the trial court granted the County’s motion for
summary judgment and took STRS’s motion off calendar as moot. The trial court ruled
on the undisputed “facts and given the relevant case law, the statute on its face and the
valuation methodology as applied here has not been shown to be unconstitutional,
violative of equal protection or arbitrary.”
          4. Appellate proceedings.
          On June 21, 2010, STRS filed a timely notice of appeal from the judgment.
          It appeared to this court the appeal by STRS presented a case of first impression in
California, involving the assessment of a taxable possessory interest, a leasehold, in tax
exempt property owned by a public retirement system. Due to the dearth of case
authority and the statewide importance of the issue, this court sent a letter to counsel
requesting supplemental briefing and inviting interested parties to participate as amicus
curiae.
          Our letter identified “two basic questions before this court: (1) Does [STRS],
which is exempt from property taxation and which paid the property tax assessed to its
lessee, have standing to challenge the lessee’s tax assessment? and (2), if this court can
reach the merits of the controversy, does . . . section 7510, subdivision (b)(1) fail to tax a
lessee’s taxable possessory interest in accordance with the possessory interest’s fair
market value so as to render the statute’s valuation methodology unconstitutional?”
          The California Public Employees’ Retirement System (CalPERS) and the
California State Board of Equalization (BOE) subsequently filed amicus briefs in support
of STRS.3


3
       The BOE has special expertise in this area (EHP Glendale, LLC v. County of Los
Angeles (2011) 193 Cal.App.4th 262, 274) and therefore its interpretation of the meaning
and legal effect of section 7510 “is entitled to consideration and respect by the courts.”
(Yamaha Corp. of America v. State Bd. of Equalization (1998) 19 Cal.4th 1, 7 (Yamaha).)
Pursuant to Government Code section 15606, subdivisions (c) and (e), it is the role of the
                                                7
                                      CONTENTIONS
       STRS contends section 7510, subdivision (b)(1), violates the California
Constitution because: (1) it does not value taxable possessory interests in accordance
with their fair market value; (2) it taxes property exempt from taxation; (3) its
classification of taxpayers violates equal protection; (4) its valuation methodology is not
uniform in its application to all similarly situated taxpayers. STRS further contends the
County violated the California Constitution in its application of section 75101,
subdivision (b)(1) to Kim.4
                                      DISCUSSION
       1. STRS, although its property is exempt from real property taxation, has standing
to challenge the methodology used by the County to levy tax against STRS’s lessee
because STRS actually paid the tax.
       Although Kim was a party below, Kim is not a party to this appeal. STRS is the
sole appellant. The County contends STRS lacks standing to prosecute this appeal
because STRS acted as a volunteer in paying the disputed tax that was levied on an
unsecured basis against Kim. We reject the County’s contention and conclude STRS has
standing to prosecute this matter.5
       The statutory scheme clearly contemplates that one person may pay property taxes
on the property of another. Revenue and Taxation Code section 2910.7 states: “Any
person who receives a tax bill respecting property which has been assessed to another
and who has power, pursuant to written or oral authorization, to pay the taxes on behalf


BOE to “[p]rescribe rules and regulations to govern . . . assessors when assessing” and to
“[p]repare and issue instructions to assessors designed to promote uniformity throughout
the state and its local taxing jurisdictions in the assessment of property for the purposes
of taxation . . . .” (Hahn v. State Bd. of Equalization (1999) 73 Cal.App.4th 985, 990-
991, fn. 4.)
4
        In addition, STRS argues the trial court erred in granting the County’s motion for
summary judgment because there is no evidence to support the factual allegations made
in the County’s motion, and the County failed to make a prima facie case that it properly
assessed Kim’s leasehold interest.
5
        Amicus BOE agrees STRS has standing to maintain this action.
                                              8
of another shall after the taxes have been paid in full and within 30 days of the receipt of
the written request of the assessee, either deposit the original or a copy of the bill in the
United States mail in an envelope addressed to the last known address of the
assessee . . . or deliver it otherwise to the assessee within said 30 days.” (Italics added.)
         Further, Revenue and Taxation Code section 5140, pertaining to property taxation,
specifies the persons authorized to bring a refund action. It states: “The person who paid
the tax, his or her guardian or conservator, the executor of his or her will, or the
administrator of his or her estate may bring an action only in the superior
court . . . against a county or a city to recover a tax which the board of supervisors of the
county or the city council of the city has refused to refund on a claim filed pursuant to
Article 1 (commencing with Section 5096) of this chapter. No other person may bring
such an action; but if another should do so, judgment shall not be rendered for the
plaintiff.” (Italics added.)
         The “ ‘limitation contained in section 5140 simply means that only a person who
has actually paid the tax may bring an action as opposed to the situation where someone
else pays the property taxes of an owner of property.’ [Citation.] [¶] [S]ection 5140 does
not affect the determination of what property is taxable and what property is exempt.
It merely defines the procedure for refunding taxes improperly collected. The procedure
provides for refund to the person who, or entity which, paid the tax if the property was
exempt. This orderly approach prevents double refund of the taxes to the party who paid
the tax and the party who owns the tax-exempt property . . . [¶] . . . [S]ection 5140 is a
mechanism for enforcing constitutional and statutory rights. Failure to follow the correct
procedural rules can result in forfeiture of the power to enforce the constitutional right.”
(Mayhew Tech Center, Phase II v. County of Sacramento (1992) 4 Cal.App.4th 497, 510,
italics added [state, as lessee, lacked standing to seek refund of taxes which it did not
pay].)




                                               9
       The reason for Revenue and Taxation Code section 5140’s “restrictive standing
requirement is evident. This limitation frees the taxing authority from the burden, often
far greater than in the instant case, of untangling a web of agreements and/or accounts in
order to ascertain who is the proper recipient of any refund due. This determination is, of
course, critical to avoiding a double payment.” (IBM Personal Pension Plan v. City and
County of San Francisco (2005) 131 Cal.App.4th 1291, 1305 [pension plan lacked
standing to sue for refund of property taxes and penalties paid by trustee of the plan on its
behalf].)
       Because STRS, not Kim, paid the tax, it is STRS and only STRS which has
standing to prosecute the refund action and standing to maintain this appeal. (Rev. &
Tax. Code, § 5140.)
       The County’s characterization of STRS as a “volunteer” does not defeat STRS’s
standing. “Under our modern refund statutes, whether a tax payment was voluntary or
involuntary is irrelevant. A taxpayer may seek a refund even without protesting the
payment. This is a far cry from the common law right of action . . . , which extended
only to payments extracted under compulsion.” (Franchise Tax Bd. v. Superior Court
(2011) 51 Cal.4th 1006, 1017 [held, taxpayer has no right to jury trial in action for refund
of state income taxes].)
       Therefore, the County’s assertion that STRS acted as a volunteer in paying Kim’s
property tax does not meet the issue. The inquiry, for purposes of determining standing
to bring a refund action, is who paid the property tax (Rev. & Tax. Code, § 5140), not the
person’s motivation for paying the tax. Because STRS paid the tax, it has standing to
litigate this matter.
       We now turn to the merits of the appeal.




                                             10
       2. Standard of review; the extent of judicial deference to administrative agency
interpretation.
       We independently determine the proper interpretation of section 7510.
“As the matter is a question of law, we are not bound by evidence on the question
presented below or by the lower court’s interpretation.” (Burden v. Snowden (1992)
2 Cal.4th 556, 562.)
       As for the degree of deference to be accorded to the interpretation of amicus BOE,
the Supreme Court addressed the issue of judicial deference to administrative agency
statutory interpretation in Yamaha, supra, 19 Cal.4th 1. While “agency interpretation of
the meaning and legal effect of a statute is entitled to consideration and respect by the
courts” (id. at p. 7), “agency interpretations are not binding or necessarily even
authoritative” (id. at p. 8). “Courts must, in short, independently judge the text of [a]
statute . . . .” (Id. at p. 7.) Yamaha determined the weight accorded to an agency’s
interpretation is “fundamentally situational” (id. at p. 12, italics omitted) and “turns on a
legally informed, commonsense assessment of [its] contextual merit” (id. at p. 14).
Yamaha set down a basic framework of factors as guidance and concluded that the degree
of deference accorded should be dependent in large part upon whether the agency has a
“ ‘comparative interpretative advantage over the courts’ ” and on whether it has probably
arrived at the correct interpretation. (Id. at p. 12.) Further, a court is less inclined to
defer to an agency’s interpretation of a statute than to its interpretation of a self-
promulgated regulation. (Ibid.)
       3. General principles re taxation of possessory interests.
       In order to provide a framework for analyzing section 7510, we begin with a brief
overview of fundamental principles pertaining to the creation and taxation of possessory
interests in real property.
       It is hornbook law that a “lessee has a present possessory interest in the premises,
[while] the lessor has a future reversionary interest and retains fee title. [Citations.]”
(Avalon Pacific-Santa Ana, L.P. v. HD Supply Repair & Remodel, LLC (2011) 192
Cal.App.4th 1183, 1190.) In other words, “when a possessory interest is created, the

                                               11
bundle of rights that constitute the fee simple interest is divided into a possessory interest
(or interests) and a nonpossessory interest (or interests). . . . [I]n the creation of a lease,
the fee simple interest is divided into the leasehold interest (i.e., the possessory interest)
and the leased fee interest (i.e., the nonpossessory interest).” (Assessors’ Handbook
Section 510, Assessment of Taxable Possessory Interests, published by BOE in
December 2002, p. 17 (hereafter, Handbook) (available at
www.boe.ca.gov/proptaxes/pdf/ah510.pdf).) A “possessory interest consists of a right to
the possession of real property for a period less than perpetuity by one party, the holder
of the possessory interest, while another party, the fee simple owner, retains the right to
regain possession of the real property at a future date.” (Id., at p. 1.)
       The term “possessory interests” is defined by statute as “[p]ossession of, claim to,
or right to the possession of land or improvements that is independent, durable, and
exclusive of rights held by others in the property, except when coupled with ownership of
the land or improvements in the same person.” (Rev. & Tax. Code, § 107, subd. (a);
see also 18 Cal. Code Regs., § 20(a) [defining possessory interests in real property].)
       Although publicly owned real property is exempt from taxation (Cal. Const., art.
XIII, § 3), possessory interests in such land or improvements “ ‘are taxable under section
107 of the Revenue and Taxation Code and in pursuance of the constitutional mandate
that “all property . . . shall be taxed.” (Const., art. XIII, § 1.)’ [Citation.] Privately held
possessory interests in property owned by the federal government, the state, and
municipalities are subject to taxation. [Citation.] Because a large proportion of
California land was (and is) in public ownership, taxation of possessory interests is an
important source of local government revenue. [Citations.]” (Connolly v. County of
Orange (1992) 1 Cal.4th 1105, 1118.)
       With respect to the standard for taxing possessory interests, under section 1 of
article XIII of the California Constitution (considered in conjunction with the provisions
of article XIIIA (Proposition 13)), all property is taxed according to its “full value,”




                                               12
meaning its fair market value, unless an alternative standard of value is constitutionally
prescribed. (Handbook, supra, at p. 16.) 6
       The applicability of the market value standard to taxable possessory interests also
was made clear by the California Supreme Court in De Luz Homes v. County of San
Diego (1955) 45 Cal.2d 546 (De Luz). “The standard of “full cash value” applies
equally to a leasehold interest. Accordingly, the assessor must estimate the price a
leasehold would bring on an open market under conditions in which neither buyer nor
seller could take advantage of the exigencies of the other.” (Id. at p. 566, italics added.)
       The statutory definition of fair market value for assessment purposes is found in
Revenue and Taxation Code section 110. “ ‘[F]air market value’ means the amount of
cash or its equivalent that property would bring if exposed for sale in the open market
under conditions in which neither buyer nor seller could take advantage of the exigencies
of the other, and both the buyer and the seller have knowledge of all of the uses and
purposes to which the property is adapted and for which it is capable of being used, and
of the enforceable restrictions upon those uses and purposes.” (Id. at subd. (a).)
       The BOE has promulgated a regulation, Property Tax Rule 21 (18 Cal. Code
Regs., § 21), which addresses the valuation of taxable possessory interests. Rule 21
provides in relevant part that “the fair market value of a taxable possessory interest is the
fair market value of the fee simple absolute interest reduced only by the value of the
property rights, if any, granted by the public owner to other persons and by the value of


6
        Article 13A, added by Proposition 13 (adopted June 6, 1978), imposed a one
percent limitation, providing “The maximum amount of any ad valorem tax on real
property shall not exceed One percent (1%) of the full cash value of such property.
(Cal. Const., art. XIIIA, § 1(a).) Article XIIIA defines “full cash value” in two ways:
“the county assessor’s valuation of real property as shown on the 1975-76 tax bill under
‘full cash value’ or, thereafter, the appraised value of real property when purchased,
newly constructed, or a change in ownership has occurred after the 1975 assessment.”
(Art. XIIIA, § 2, subd. (a).) The full cash value base thereafter may be adjusted to
“reflect from year to year the inflationary rate not to exceed 2 percent for any given
year . . . , or may be reduced to reflect . . . a decline in value.” (Art. XIIIA, § 2,
subd. (b).)
                                             13
the property rights retained by the public owner (excluding the public owner’s right to
receive rent).” (18 Cal. Code Regs., § 21(b)(1).)
       Perhaps “the cardinal feature of a taxable possessory interest is that it is an interest
of finite duration. At some future date, the interest of the private possessor will
terminate, and possession of the property will revert to the public owner.” (Handbook,
supra, at p. 21.) Therefore, “[w]hen valuing a taxable possessory interest, the appraiser
must determine a term of possession for the interest. . . . The term of possession also
affects the value of a taxable possessory interest. All else being equal, the longer the term
of possession, the higher the value of the possessory interest.” (Ibid.)
       With this overview of the creation and valuation of private possessory interests in
publicly owned property, we turn to section 7510, which is the focus of this controversy.
       4. History of section 7510.
       In 1982, the Legislature enacted Education Code former section 22313 to
authorize STRS to invest a portion of its assets in real estate, so as to broaden STRS’s
investment opportunities on behalf of its members and retirees. (Assem. Bill No. 662
(1981-1982 Reg. Sess.) (AB 662); Stats. 1982, ch. 24, § 1.)
       Property which is owned by STRS is exempt from real property taxation.
(Cal. Const., art. XIII, § 3(a).) Therefore, at the same time that it expanded STRS’s
investment authority, the Legislature enacted section 7510 (Stats. 1982, ch. 24, § 2), to
require STRS to reimburse local governments by way of an “in lieu” fee, so as to offset
the local governments’ loss of property tax revenues resulting from such investments.
(State and Consumer Services Agency, Enrolled Bill Rep. on AB 662, Feb. 4, 1982.)




                                              14
       As enacted, section 7510 stated in pertinent part: “A public retirement system,
which has invested assets in real property and improvements thereon for business or
residential purposes for the production of income, shall pay annually to the city or
county, in whose jurisdiction the real property is located and has been removed from the
secured roll, a fee for general governmental services equal to the difference between the
amount that would have accrued as real property secured taxes and the amount of
possessory interest unsecured taxes paid for that property. The governing bodies of local
entities may adopt ordinances and regulations authorizing retirement systems to invest
assets in real property subject to the forgoing requirements.” (Stats. 1982, ch. 24, § 2,
italics added.)
       In other words, although the lessees of real property owned by STRS or CalPERS
paid property taxes based on the lessees’ possessory interest, “the amount of the
combined possessory interest in a parcel [was] less than the amount of the parcel’s full
fair market value. Therefore, the property tax collected from [CalPERS] and STRS
lessees [was] less than what would be collected by the county if the parcel were privately
owned. To make up for this loss in property tax revenues, [section 7510] allow[ed] local
governments to charge [CalPERS] and STRS an ‘in-lieu’ fee to pay for the county’s
general services.” (Governor’s Office of Planning & Research, Enrolled Bill Rep. on
Sen. Bill No. 1687 (SB 1687), Sept. 2, 1992.)
       In 1991, the Attorney General opined section 7510’s imposition of an “in lieu”
fee for general government services upon CalPERS based on its ownership of real
property was unconstitutional. (74 Ops.Cal.Atty.Gen. 6 (1991).) The opinion reasoned
the “ ‘fee for general governmental purposes’ imposed by section 7510 [was] not a ‘fee’
at all,” but rather, “an ‘ad valorem tax on real property’ . . . , since it is exacted for the
general expenses of local governments.” (Id. at p. 3.)
       The following year, mindful of the Attorney General’s opinion, the Legislature
amended section 7510 to abolish the “in-lieu fee and instead require that all leases
include a provision which would directly pass the full property tax onto the lessee.”
(Governor’s Office of Planning & Research, Enrolled Bill Rep. on SB 1687, Sept. 2,

                                               15
1992, p. 1.) Thus, the Legislature decided to shift the entire property tax burden to the
lessee, even though the lessee merely had held a possessory interest in the property.
       As amended in 1992, section 7510 provided in relevant part at subdivision (b)(1):
“Whenever a state public retirement system, which has invested assets in real property
and improvements thereon for business or residential purposes for the production of
income, leases the property, the lease shall provide, pursuant to Section 107.6 of the
Revenue and Taxation Code, that the lessee’s possessory interest may be subject to
property taxation and that the party in whom the possessory interest is vested may be
subject to the payment of property taxes levied on that interest. The lease shall also
provide that the full cash value, as defined in Sections 110 and 110.1 of the Revenue and
Taxation Code, of the possessory interest upon which property taxes will be based shall
equal the greater of (A) the full cash value of the possessory interest, or (B), if the lessee
has leased less than all of the property, the lessee’s allocable share of the full cash value
of the property that would have been enrolled if the property had been subject to property
tax upon acquisition by the state public retirement system. The lessee’s allocable share
shall be the lessee’s leasable square feet divided by the total leasable square feet of the
property.” (Stats. 1992, ch. 1158, § 1, p. 5409.)7



7
        The two subsequent amendments to section 7510 are not in issue. (See Historical
& Statutory Notes, 32A Pt. 3 West’s Ann. Gov. Code (2008 ed.) foll. § 7510, p. 470;
Stats. 1993, ch. 1187, § 2 (SB 70); Stats. 1994, ch. 1281, § 1 (SB 1972).) Because Kim
was a lessee for the entire tax year ending June 30, 2007, we are not concerned with the
portion of section 7510, subdivision (b)(1), which requires the valuation of a possessory
interest to “reflect the anticipated term of possession if, on the lien date described in
Section 2192 of the Revenue and Taxation Code [i.e., January 1 preceding the fiscal year
for which the taxes are levied], that term is expected to terminate prior to the end of the
next succeeding fiscal year.” We also are not concerned with section 7510, subdivision
(a), which, by its terms, does “not apply to property owned by any state public retirement
system.” (§ 7510, subd. (a)(3).)
        Further, this is not a situation in which a single lessee occupies an entire property.
Our focus is squarely on section 7510, subdivision (b)(1), as it relates to lessees such as
Kim, who leased only a portion of the subject property. The pertinent provision is “the
possessory interest upon which property taxes will be based shall equal the greater of
                                              16
       The constitutionality of the 1992 enactment was an issue from the inception.
The legislative history of SB 1687 reveals that at the time the bill was under
consideration, the BOE took the position that the 1992 amendment to section 7510 was
unconstitutional. The BOE opined that “requiring the full value of the full fee interest to
be assessed against a private lessee would amount to taxation of constitutionally exempt
property. Accordingly, it appears that a constitutional amendment would be necessary to
accomplish the purpose of this bill.” (BOE, Legislative Bill Analysis of SB 1687, July 7,
1992.)8
       Similarly, the Assembly Republican Caucus opined “this bill may be
unconstitutional because it may tax leaseholders at a higher rate than the fair market
value of a leasehold estate and it would require leaseholders to make payments based on
the ownership interest in the property even though the lessee holds only a possessory
interest.” (Governor’s Office of Planning & Research, Enrolled Bill Rep. on SB 1687,
Sept. 2, 1992, p. 5.)
       Notwithstanding these concerns, the Governor approved the bill and it took effect
as an urgency measure on September 30, 1992.
       In sum, the 1992 amendment to section 7510 was a departure from the standard of
assessing possessory interests based on fair market value. Section 7510, subdivision
(b)(1) created a special rule for investment property owned by a state public retirement
system. Instead of taxing lessees of such property based on the fair market value of their
possessory interests, the lessees were to be taxed based on their “allocable share of the
full cash value of the property that would have been enrolled if the property had been
subject to property tax upon acquisition by the state public retirement system,” with the



(A) the full cash value of the possessory interest, or (B), if the lessee has leased less than
all of the property, the lessee’s allocable share of the full cash value of the property . . . .”
(§ 7510, subd. (b)(1), italics added.)
8
        Regardless of the BOE’s longstanding doubt as to the constitutionality of section
7510, subdivision (b), as an administrative agency it lacks the power to declare a statute
unconstitutional or to refuse to enforce a statute. (Cal. Const., art. III, § 3.5.)
                                               17
lessee’s allocable share based upon the lessee’s percentage of “the total leasable square
feet of the property.” (Ibid.)
       5. Section 7510, subdivision (b), insofar as it requires a lessee to pay property tax
on constitutionally exempt public owned real property, violates California Constitution
article XIII, section 3(a).
       The constitutionality of section 7510, subdivision (b), an issue which has been
dormant since 1992, is now squarely before this court.
       The key constitutional provision for our purposes is article XIII, section 3(a) of the
California Constitution, providing that “Property owned by the State” is exempt from
property taxation. STRS, as a unit of the State and Consumer Services Agency, is a unit
of state government performing a state function. (Ed. Code, § 22001; 68
Ops.Cal.Atty.Gen. 71.) Therefore, property owned by STRS is exempt from property
tax.
       The issue is the valuation of Kim’s possessory interest, consisting of a portion of
the retail space in the subject building owned by STRS. In this regard, section 7510
states in pertinent part at subdivision (b)(1): “The lease shall also provide that the full
cash value, as defined in Sections 110 and 110.1 of the Revenue and Taxation Code, of
the possessory interest upon which property taxes will be based shall equal the greater of
(A) the full cash value of the possessory interest, or (B), if the lessee has leased less than
all of the property, the lessee’s allocable share of the full cash value of the property that
would have been enrolled if the property had been subject to property tax upon
acquisition by the state public retirement system.” (Italics added.)
       The County applied the valuation methodology of the statute. As set forth above
in some detail (Factual & Procedural Background, ante, § 3(b)), the County valued Kim’s
possessory interest by taking Kim’s percentage of the total leasable square footage of the
building (3.317437 percent of the retail rentable square footage), and multiplying it by
the Proposition 13 adjusted value of the building’s overall retail space ($12,618,715),




                                              18
thereby assessing Kim’s leasehold interest at $418,618. Based on the assessed value, the
County levied property tax against Kim in the amount of $4,983.34.9
       The defect in this valuation methodology, which is prescribed by section 7510,
subdivision (b)(1), is that is taxes property which is constitutionally exempt from
taxation. The County allocated the entire valuation of the building to the various lessees,
such as Kim, without any reduction for the value of the reversionary interest retained by
STRS, the lessor, which owns the building in fee simple.
       Further, the County made no adjustment for the fact that Kim’s lease was winding
down. As the BOE recognizes, absent special circumstances, a taxable possessory
interest normally declines in value with each passing year. Here, however, the County
assessed Kim’s leasehold interest at $418,618, toward the end of the lease term, based on
nothing more than STRS’s acquisition price of the property in 1985, trended forward to
2006. Thus, Kim’s assessment was based on the fee simple value of the property, rather
than on the value of the possessory interest.
       The vice in section 7510, subdivision (b)(1), is that it values tax exempt real
property using the fee simple value of the property, and taxes the lessees based on the
entire assessed value. California Constitution article XIII, section 3(a), exempts
“[p]roperty owned by the State,” rather than the State itself. (Italics added.) The
reversionary interest in the subject real property is State-owned property and therefore is
exempt from taxation. Section 7510, subdivision (b)(1) does not become constitutional
simply because it shifts the tax on the reversionary interest to the lessees of STRS.


9
        The methodology the County utilized in assessing Kim’s possessory interest was
inconsistent with the methodology set forth on the Los Angeles County Assessor’s
website. (http://assessor.lacounty.gov/extranet/overview/possint.aspx.) The website
states: “The valuation of possessory interests is different from other forms of property
tax appraisal in two ways: [¶] 1. Only the rights held by the private user are valued.
[¶] 2. The Assessor must not include the value of the lessor’s retained rights in the
property or any rights that will revert back to the public owner (the ‘reversionary
interest’) at the end of the lease. [¶] As a result, possessory interest assessments
are frequently less than the assessments of similar privately-owned property.”
(Ibid., italics added.)
                                                19
We conclude that in order to satisfy article XIII, section 3(a), which exempts STRS’s real
property from taxation, the value of the rights retained by the exempt owner of the real
property must be excluded in order to determine the proper valuation of Kim’s taxable
possessory interest.
       The BOE Handbook, dealing with possessory interests generally, is mindful of
these issues. 10 It states: “With a taxable possessory interest, since the underlying fee
simple interest held by the public owner is almost always tax exempt, it is necessary to
separately value the possessory interest held by the private possessor. (Handbook, supra,
at p. 1.) The Handbook explains: “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 the 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 public owner and is nontaxable.” (Handbook,
supra, at p. 23, italics added.)
       The BOE’s regulation pertaining to the valuation of a taxable possessory interest
in publicly owned real property, Property Tax Rule 21, also covers the point. The
regulation states in pertinent part, “the fair market value of a taxable possessory interest
is the fair market value of the fee simple absolute interest reduced only by the value of the
property rights, if any, granted by the public owner to other persons and by the value of
the property rights retained by the public owner . . . .” (18 Cal. Code Regs., § 21(b)(1),
italics added.) The BOE’s valuation method, applicable to possessory interests generally,
prevents the lessee from being taxed on the value of the reversionary interest retained by




10
       A court may properly consider the Handbook in determining the appropriate
method of valuation. (Carlson v. Assessment Appeals Bd. 1 (1985) 167 Cal.App.3d 1004,
1013.)
                                             20
the public lessor, and therefore comports with California Constitution, article XIII,
section 3(a).
       6. Section 7510(b)(1), by including the full value of the fee interest in
the assessable value of the tenant’s possessory interest, also violates the constitutional
prohibition on taxing property in excess of its fair market value. (Cal. Const., art.
XIII, § 1.)
       Section 7510(b)(1) is constitutionally infirm not only because it taxes property
which is exempt from taxation, but also because it taxes the lessee’s possessory interest
on an assessed value in excess of fair market value.
       California Constitution article XIII, section 1 states: “Unless otherwise provided
by this Constitution or the laws of the United States: [¶] (a) All property is taxable and
shall be assessed at the same percentage of fair market value.”
       A “cardinal principle of property taxation is that property is ordinarily taxable at
its ‘fair market value.’ (Cal. Const., art. XIII, § 1; [Rev. & Tax. Code,] § 110.5.)”
(Prudential Ins. Co. v. City and County of San Francisco (1987) 191 Cal.App.3d 1142,
1149.) The term “fair market value” is defined by statute as “the amount of cash or its
equivalent that property would bring if exposed for sale in the open market under
conditions in which neither buyer nor seller could take advantage of the exigencies of the
other, and both the buyer and the seller have knowledge of all of the uses and purposes to
which the property is adapted and for which it is capable of being used, and of the
enforceable restrictions upon those uses and purposes.” (Rev. & Tax. Code, § 110,
sub. (a).)
       Thus, Kim’s possessory interest in STRS’s building was taxable, but the correct
standard for valuation of the possessory interest is fair market value, rather than the
formula dictated by section 7510, subdivision (b)(1).
                a. Proper valuation of fair market value of lessee’s possessory interest
requires exclusion of value of reversionary interest.
       With respect to the valuation of possessory interests in tax exempt property, we
are guided by De Luz, supra, 45 Cal.2d 546. That case involved a 562-unit housing

                                              21
project built by De Luz, a private developer, on federal land at Camp Pendleton, a
military installation in San Diego County. (Id. at p. 553.) The federal government
leased a 95-acre parcel to De Luz for a period of 75 years. De Luz, at its own
expense, constructed the buildings and leased the units at federally specified rents.
(Id. at pp. 553-555.) De Luz’s obligations included paying all taxes and assessments
which were imposed “ ‘upon the Lessee with respect to or upon the leased premises.’ ”
(Id. at p. 554.)
       The De Luz court was presented with the issue of the valuation of the taxpayer’s
possessory interest in the federally owned tax exempt real property. (De Luz, supra,
45 Cal.2d at p. 561.) De Luz noted that possessory interests are not usually assessed for
property tax purposes separately from the fee unless there is a need to do so, such as
where the fee is exempt from taxation. (Id. at p. 563; see 1 Tax. Cal. Prop. § 3:7
(4th ed.).)
       De Luz explained: “The Constitution requires not only that all nonexempt
property be taxed [citations], but that except as otherwise specified all property be
assessed by the same standard of valuation. . . . . [¶] Since nonexempt possessory
interests in land and improvements, such as the leasehold estates involved in the present
actions, are taxable property [citations], they too must be assessed at ‘full cash value.’
In practice, assessors usually enter the entire value of land and improvements on the
tax roll without distinction between possessory and reversionary interests, and since this
practice results in a single amount reflecting both interests on the roll, the constitutional
mandate that all property be taxed is obeyed. [Citation.] As between reversioners and
possessors payment of the tax is a private arrangement. [Citations.] When, however, the
possessory interest is taxable and the reversion is exempt, only the possessory interest is
subject to assessment and taxation. [Citations.] ‘When . . . there is a lease of land
owned by the state or a municipality, the reversion being exempt from taxation, the




                                              22
usufructuary[11] interest alone is subject to tax in proportion to its value; and in the
absence of agreement to the contrary, the tax necessarily falls upon the lessee.’
[Citation.]” (De Luz, supra, 45 Cal.4th at pp. 562-563, italics added, fn. omitted.)
       Thus, De Luz teaches that in valuing the possessory interest of a private lessee in
tax exempt publicly owned real property, only the possessory interest is subject to tax in
proportion to its value. Because the reversionary interest is exempt from taxation, its
value must be excluded in determining the value of the possessory interest.
              b. Proper standard for determining valuation of lessee’s possessory
interest is fair market value.
       As for the method of valuing the lessee’s possessory interest, De Luz held:
“In valuing property, the assessor must adhere to the statutory standard of ‘full cash
value,’ and must therefore estimate the price the property would bring on an open market
under conditions in which neither buyer nor seller could take advantage of the exigencies
of the other. . . . . [¶] The standard of ‘full cash value’ applies equally to a leasehold
interest. Accordingly, the assessor must estimate the price a leasehold would bring on an
open market under conditions in which neither buyer nor seller could take advantage of
the exigencies of the other.” (De Luz, supra, 45 Cal.2d at p. 566.)
       Section 7510, subdivision (b)(1) flies in the face of these principles. It provides
that for a property such as the instant building owned by STRS, where “the lessee has
leased less than all of the property,” the lessee’s assessment is based on “the lessee’s
allocable share of the full cash value of the property that would have been enrolled if the
property had been subject to property tax upon acquisition by the state public retirement
system.” (§ 7510, subd. (b)(1).) The lessee’s allocable share is based on the lessee’s
proportionate share of the “the total leasable square feet of the property.” (Ibid.) Thus,
the statute disregards the lessee’s constitutional right to be taxed purely on the value of
the lessee’s possessory interest. Instead, the statute takes the full cash value of the


11
       “Usufructary” denotes the right of enjoying a thing, the property of which is
vested in another. (Black’s Law Dict. (5th ed. 1979) p. 1384.)
                                              23
property, that is to say, both the possessory and reversionary interests, and allocates the
entire value to the lessee – even though the lessee has nothing more than a possessory
leasehold interest (the value of which normally declines with each passing year).
Because the statute requires a fee simple valuation methodology, without reduction for
the value of the property rights retained by the public owner, the valuation by definition
does not represent the fair market value of the lessee’s possessory interest.
       We conclude section 7510, subdivision (b)(1), is facially unconstitutional
(Cal. Const., art. XIII, § 1) because it allocates the entire value of the fee to lessees who
merely hold a possessory interest in tax exempt real property. By allocating the entire
value of the fee to the public entity’s lessees, the statute requires the lessees to be taxed
on a value in excess of the fair market value of the lessees’ possessory interest.
       7. Remaining issues not reached.
       Having determined that section 7510, subdivision (b)(1), is facially
unconstitutional because it fails to make a reduction for the value of property rights
retained by the public lessor, we need not address STRS’s argument that Kim’s assessed
value also should have been reduced to exclude the value of areas common to all tenants,
such as parking structures, lobbies, elevators, hallways and restrooms. Likewise, it is
unnecessary to reach STRS’s argument that section 7510, subdivision (b)(1), violates
California’s equal protection clause (Cal. Const., art. I, § 7) by taxing similarly situated
taxpayers in disparate ways with no rational basis, or any other issues.
                                    CONCLUSION
       Section 7510, subdivision (b)(1), is facially unconstitutional insofar as it bases a
lessee’s assessment on the lessee’s allocable share of the full cash value of the property,
based on the lessee’s percentage of the total leasable square feet of the property.
Under the statute, the exempt remainder or reversionary interest, belonging to the public
retirement system owner, is included in the assessment of the lessee’s possessory interest.
Therefore, the statute violates the prohibition against assessing property taxes on publicly
owned real property (Cal. Const., art. XIII, § 3(a)), as well as the prohibition on assessing
property in excess of its fair market value. (Cal. Const., art. XIII, § 1.)

                                              24
                                    DISPOSITION
      The judgment in favor of the County is reversed. The matter is remanded to the
trial court with directions to remand the matter to the County Assessment Appeals
Board to determine the proper value of Kim’s leasehold interest, pursuant to the valuation
principles promulgated by the BOE at 18 California Code of Regulations section 21,
in accordance with the views expressed herein. STRS shall recover its costs on appeal.
      CERTIFIED FOR PUBLICATION




                                                       KLEIN, P. J.


      We concur:



                    CROSKEY, J.




                    KITCHING, J.




                                           25
