Consideration of terms of ground lease in valuing casino property.

Author:Blair, Benjamin A.

PPE owns Maryland Live! Casino, which is situated adjacent to the Arundel Mills Mall (Mall) in Hanover, Maryland. The casino property consists of a seven-level parking garage and a 333,164-square-foot casino. The casino was constructed in 2009 after Maryland voters ratified a constitutional amendment authorizing video lottery terminals in five locations throughout the state, including the subject site in Anne Arundel County.

Following a proposal for the newly authorized terminals, PPE was selected as a video lottery provider. PPE negotiated a deal with the owner of the Mall to acquire a site at the Mall for the casino, executing a 99-year ground lease in April 2009, subject to various rights of termination.

Under the ground lease, PPE was required to make two annual payments. The first was a minimum annual rent of $2 million, less a credit for the cost of the parking garage built by PPE. The minimum rent was to increase by 1% every year. Additionally, PPE was required to pay 1% of annual gross revenues generated at the casino; thus, the second payment component is directly tied to the operation of the casino business.

The County Supervisor of Assessments (County) assigned a value of $220.9 million for the 2012 assessment, increasing to $264-4 million for 2014. PPE obtained an appraisal indicating a value of $172.4 million and $191.4 million in 2012 and 2014, respectively. Accordingly, PPE filed an appeal to the tax court, which ruled in PPE's favor. The County appealed the decision to the local circuit court.

The County argued that the tax court erred by failing to consider the ground lease between PPE and the Mall. According to the County, controlling precedent holds that failing to consider the value placed on a property by parties to a leasehold contract is legally improper and at odds with the willing seller/willing purchaser approach to market value. As a consequence, the County argued that PPE and its landlord established the value of the property via their arm's-length real estate transaction, which the tax court characterized as a "business arrangement."

PPE argued that it and the tax court had both properly considered the ground lease in valuing the property, but that they permissibly chose instead to rely on a market analysis as the best indication of value. The tax court, when presented with competing valuations using different methodologies, chose PPE's approach. According to the tax court, relying on the percentage rent was too...

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