Taxation of possessory interest in aircraft hangar facility.

Author:Blair, Benjamin A.
 
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Centennial Airport is owned by the Arapahoe County Airport Authority (Authority), which is a tax-exempt political subdivision of the State of Colorado. In 2006, the Authority leased seventy acres of airport land in Douglas County to Denver JetCenter (DJC) at a rate of five cents per square foot pursuant to a master lease. The initial term of the master lease is 40 years with optional extensions of another 50 years.

Under the terms of the master lease, DJC was required to construct or contract for the construction of certain improvements on the leased land. Those improvements include an aircraft hangar facility. DJC may also enter into a sublease to provide some of the required improvements and service.

In 2011, DJC entered into a sublease with Rare Air to satisfy its obligation to construct the hangar. The sublease covered three acres of land, requiring rent payments of 35 cents per square foot with a base term of 25 years. The sublease obligated Rare Air to construct an aircraft hangar, storage, and office space. Rare Air is deemed to own and hold title to all improvements made by Rare Air until the expiration of the lease, at which time title will vest in DJC. Rare Air has the exclusive right to possess, use, operate, and receive revenues from the hangar facility.

The Colorado constitution directs that all real and personal property must be taxed unless it is exempted in accordance with law. As a result, buildings and structures are subject to taxation as real property unless exempted. For the 2015 tax year, the Douglas County Assessor valued Rare Air's hangar facility at $2.87 million. Although Rare Air did not dispute that assigned value, it did claim that the hangar should be assessed to DJC's leasehold interest in the seventy acres under the master lease. Douglas County agreed, but the Property Tax Administrator disagreed and denied the abatement of taxes. Rare Air appealed to the Board of Assessment Appeals, which upheld the Tax Administrator's decision, and Rare Air appealed to the Court of Appeals.

At the Colorado Court of Appeals, Rare Air contended that DJC, not Rare Air, holds a taxable interest in the hangar facility. In weighing this argument, the court noted that Rare Air constructed the hangar at its own expense, and the sublease vests in Rare Air significant benefits of ownership in the...

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