Opinion
No. 1 CA-TX 19-0005
05-12-2020
SKY RANCH OPERATIONS LLC, Plaintiff/Appellant, v. YAVAPAI COUNTY, et al., Defendants/Appellees.
COUNSEL Frazer, Ryan, Goldberg & Arnold, LLP, Phoenix By Douglas S. John Counsel for Plaintiff/Appellant Yavapai County Attorney's Office, Prescott By Martin J. Brennan, Benjamin D. Kreutzberg Counsel for Defendants/Appellees Yavapai County
NOTICE: NOT FOR OFFICIAL PUBLICATION. UNDER ARIZONA RULE OF THE SUPREME COURT 111(c), THIS DECISION IS NOT PRECEDENTIAL AND MAY BE CITED ONLY AS AUTHORIZED BY RULE.
Appeal from the Arizona Tax Court
No. TX2017-001674
The Honorable Christopher T. Whitten, Judge
AFFIRMED
COUNSEL
Frazer, Ryan, Goldberg & Arnold, LLP, Phoenix
By Douglas S. John
Counsel for Plaintiff/Appellant
Yavapai County Attorney's Office, Prescott
By Martin J. Brennan, Benjamin D. Kreutzberg
Counsel for Defendants/Appellees Yavapai County
MEMORANDUM DECISION
Judge Jennifer M. Perkins delivered the decision of the Court, in which Presiding Judge David D. Weinzweig and Judge James B. Morse Jr. joined.
PERKINS, Judge:
¶1 Sky Ranch Operations, LLC ("Sky Ranch") appeals from the entry of summary judgment in favor of Yavapai County (the "County") and the Arizona Department of Revenue upholding the 2016 and 2017 tax assessments against Sky Ranch. The sole issue on appeal is whether Sky Ranch owns the improvements on property it leases from the Sedona Oak Creek Airport Authority ("Airport Authority"). We affirm.
FACTUAL AND PROCEDURAL HISTORY
¶2 The County owns and leases land to the Airport Authority to operate the Sedona Airport. In 1982, the Airport Authority subleased several acres to Sky Ranch to build and operate the Sky Ranch Lodge. The sublease has been extended through 2050.
¶3 The County taxed Sky Ranch for the resort buildings as Improvements on Possessory Rights in 2016 and 2017. Sky Ranch sought a refund, arguing the taxes were illegal because the County owns the improvements. After the parties filed cross-motions for summary judgment, the tax court concluded that Sky Ranch owned the improvements and upheld the tax. Sky Ranch timely appealed. We have jurisdiction under A.R.S. section 12-2101(A)(1).
DISCUSSION
¶4 Summary judgment is appropriate if "there is no genuine dispute as to any material fact and the moving party is entitled to judgment as a matter of law." Ariz. R. Civ. P. 56(a); see also Orme School v. Reeves, 166 Ariz. 301, 309 (1990). We review the tax court's grant of summary judgment de novo. Calpine Const. Fin. Co. v. Ariz. Dep't of Revenue, 221 Ariz. 244, 247, ¶ 12 (App. 2009).
¶5 "The general rule is that 'a permanent structure placed upon and attached to the realty by a tenant is real property belonging to the lessor.'" Id. at 248, ¶ 16 (quoting Cutter Aviation, Inc. v. Ariz. Dep't of Revenue,
191 Ariz. 485, 492 (App. 1997)). Parties may alter this rule, however, by specifically agreeing to treat the improvements as owned by lessee. Id.; see also Maricopa Cty. v. Novasic, 12 Ariz. App. 551, 553 (1970).
¶6 The Sky Ranch lease provides:
All buildings, structures, equipment and fixtures installed by Lessee in accordance with the provisions of the lease, shall be and remain the property of Lessee during the term of this lease. Such buildings, structures and fixtures so installed by Lessee shall be, and the same are hereby made, security for the faithful performance of each and all the terms, conditions and covenants of this lease, including but not limited to the payment of rent. Upon termination of this lease for any cause, all buildings, structures and fixtures (but not trade fixtures) shall become the property of Lessor and the County.
(Emphasis added). The parties thus agreed that Sky Ranch would own the improvements for the lease term. Similar provisions "may not be conclusive by [themselves]," Calpine, 221 Ariz. at 248, ¶ 17, but this provision is specific and "more precisely" expresses the parties' intent," ELM Ret. Ctr., LP v. Callaway, 226 Ariz. 287, 291, ¶ 18 (App. 2010). We consider this language "in light of all other parts of the lease." Calpine, 221 Ariz. at 248, ¶ 17 (quoting Novasic, 12 Ariz. App. at 553).
¶7 Sky Ranch cites several similarities to Airport Properties v. Maricopa Cty., 195 Ariz. 89, 95-97, ¶¶ 15-21, 24 (App. 1999); Cutter Aviation, 191 Ariz. at 492; and Novasic, 12 Ariz. App. at 553-54, all of which held that the lessors owned the improvements built by the lessees. But unlike here, the lease agreements in those cases did not expressly recognize that the lessee would own the improvements for the term of the lease. See Airport Props., 195 Ariz. at 95, ¶ 19; Cutter Aviation, 191 Ariz. at 492; Novasic, 12 Ariz. App. 479-80.
¶8 Beyond that plain term, the lease confirms that Sky Ranch "enjoy[ed] the traditional rights of control and disposition of the improvements." Cutter Aviation, 191 Ariz. at 491. For example, the lease preserved Sky Ranch's right to "convey or encumber" its "interest in and rights in all buildings, structures, improvements, fixtures and personal property situated or to be placed on the leases premises, as security for any actual bona fide indebtedness." To that end, Sky Ranch offered the improvements as collateral under a loan agreement. Sky Ranch has also previously taken the position that it owns the improvements when
negotiating with the City of Sedona. That Sky Ranch previously held itself out as the owner of the improvements supports the conclusion that the parties intended the lease to abrogate the general ownership rule and provide that Sky Ranch owns the improvements.
¶9 "Despite this language, Sky Ranch argues that "premises" includes both the land and improvements, such that Sky Ranch cannot convey the improvements, but the lease says otherwise. Sky Ranch may convey or encumber its leasehold interest and its interests in the improvements, which suggests that these are separate interests. As the tax court noted in its summary judgment ruling, the lease itself "pledged the improvement to [the Airport Authority] as security for nonperformance of the lease . . . ."
¶10 As further evidence that Sky Ranch owns the improvements, the County notes that the lease extends to the "premises," which is described as only the raw land. See Calpine, 221 Ariz. at 248, ¶ 17 (finding lease of only raw land indicates the lessee owns the improvements). Although we have concluded that a lease extending only to the land was "unremarkable" because no improvements had been built when the parties entered the lease, see Cutter Aviation, 191 Ariz. at 492 n.1; accord Airport Props., 195 Ariz. at 95, ¶ 20, the present lease has been amended three times since the improvements were built and the lease description remains the same.
¶11 The County also relies on the lease provision that entitles Sky Ranch to the condemnation proceeds representing the value of the improvements and lessee's lost use of the improvements. We do not place significant weight on this provision, however, because courts have interpreted it differently. Compare Calpine, 221 Ariz. at 248, ¶ 17 (finding a similar provision supported the conclusion that lessee owned improvements), with Cutter Aviation, 191 Ariz. at 492 n.1 (finding a similar provision was "unremarkable" because no improvements had been built when the parties entered the lease), and Airport Properties, 195 Ariz. at 96-97, ¶ 24 (finding a similar provision meant to compensate for the loss of the lessee's leasehold interest).
¶12 Sky Ranch counters that, unlike the Calpine lease, it cannot remove or replace the improvements without restriction. 221 Ariz. at 248, ¶ 18. But the Calpine lessee did not have an unfettered right to remove the improvements; it had a limited right to remove or replace improvements in the ordinary course of lessee's power plant business. Id. This distinction is thus unavailing.
¶13 Sky Ranch also argues it only has a leasehold interest in the improvements because the County owns the improvements when the lease terminates. However, in addressing a similar argument, Calpine, 221 Ariz. at 249, ¶¶ 19-21, concluded that the lessor's reversionary interest in the improvements did not determine who presently owned the improvements. That court decided the issue by looking at which party had "present rights of ownership" in the lease. Id. at ¶ 21. Similarly, the lease here expressly grants a present ownership interest in the improvements to Sky Ranch; thus, the reversion provision does not control. Id.; see also ELM Ret. Ctr., 226 Ariz. at 291, ¶ 18.
¶14 Sky Ranch finally contends that the lease contains several provisions reflecting an intent to treat the County as owner of the improvements. As in Cutter Aviation and Novasic, the lease requires insurance naming both the lessor and lessee as insureds, precludes subleasing, restricts the lessee's use of the property, requires lessor's approval of building plans, and bases the rent on the gross income of the resort. Sky Ranch also argues that, like Maricopa Cty. v. Fox Riverside Theatre Corp., 60 Ariz. 260, 264-65 (1943), its construction of improvements represented partial consideration under the lease, thereby establishing that the improvements are part of the leased property.
¶15 We are not persuaded. Here again, despite those similar provisions, the Sky Ranch lease expressly directs that the improvements "shall be and remain the property of the Lessee during the term of th[e] lease." There was no similar expression of intent in Airport Props., 195 Ariz. at 95, ¶ 19; Cutter Aviation, 191 Ariz. at 492; or Novasic, 12 Ariz. App. 479-80. We give great weight to the more specific language expressly addressing ownership. Brisco v. Meritplan Ins. Co., 132 Ariz. 72, 75-76 (App. 1982); ELM Ret. Ctr., 226 Ariz. at 291, ¶ 18. The language in paragraph 6 of the lease clearly and expressly provides that Sky Ranch owns the improvements.
¶16 The provisions in the Sky Ranch lease also differ from the lease provisions in the cited cases, including the requirement that the insurance proceeds be paid "in accordance with their respective interests as to the loss." See Cutter Aviation, 191 Ariz. at 491; Novasic, 12 Ariz. App. at 554. And, unlike the insurance provision in Novasic, 12 Ariz. App. at 554, any proceeds need not be applied "solely to reconstruction and repair." The insurance provisions recognize that Sky Ranch has a separate interest in the improvements. In sum, the lease contains no provision to rebut the express provision granting Sky Ranch ownership of the improvements.
CONCLUSION
¶17 We affirm. As a result, we deny Sky Ranch's request for attorneys' fees as the successful party on appeal under A.R.S. § 12-348.