Real and tangible personal property rented to the surcharge taxpayer

# (a)

# (1)

Real and tangible personal property rented to the surcharge taxpayer must be included for purposes of computation of the property factor.

# (2)

The value of real and tangible personal property that is rented to the surcharge taxpayer is determined by multiplying the gross rents payable during the period covered by the report by eight.

# (b)

The term “gross rents” as used in this section means the actual sum of money or other consideration payable, directly or indirectly, either by the surcharge taxpayer or for its benefit for the use or possession of the property and includes:

# (1)

Any amount payable for the use or possession of real and tangible personal property, or any part of such property, whether designated as a fixed sum of money or as a percentage of sales, profits or otherwise.
(i) Example.
A surcharge taxpayer, pursuant to the terms of a lease, pays the lessor $1,000 per month and at the end of the year pays the lessor 1% of its gross sales. Its gross sales were $400,000, resulting in a gross rent of $16,000.

# (2)

Any amount payable as additional rent or payable in lieu of rent, such as interest, taxes, insurance, repairs or any other amount made payable by the terms of a lease or other arrangement.
(i) Example.
A surcharge taxpayer, pursuant to the terms of a lease, pays its lessor $24,000 a year. It also pays real estate taxes of $4,000 and interest on a mortgage in the amount of $2,000 pursuant to the lease. The taxpayer’s gross rent is $30,000.

# (3)

The proportionate part of the cost of any improvement to real and tangible personal property made by or on behalf of the surcharge taxpayer that reverts to the owner or lessor upon termination of a lease or other arrangement. The amount to be included in gross rents is based on the unexpired term of the lease commencing with the date the improvement is completed (or the life of the improvement if its life expectancy is less than the unexpired term of the lease). However, where a building is erected on land leased by or on behalf of the surcharge taxpayer, the value of the land is determined by multiplying the gross rent by eight, and the value of the building is determined in the same manner as if owned by the surcharge taxpayer. The proportionate part of the cost of an improvement (other than a building on leased land) is generally equal to the amount of amortization allowed in computing entire net income, regardless of whether the lease contains an option for renewal.

(i) Examples.
Example 1: A surcharge taxpayer enters into a 21-year lease of certain premises at a rental of $20,000 a year. After the expiration of one year, it installs a new store front at a cost of $10,000 that reverts to the owner upon the expiration of the lease. Its gross rent for the first year is $20,000.
However, for subsequent years its gross rent is $20,500 ($20,000 annual rent plus 1/20th of $10,000, the cost of the improvement apportioned on the basis of the unexpired term of the lease).
Example 2: A surcharge taxpayer leases a parcel of vacant land for 40 years at an annual rental of $5,000 and erects a building on the land that costs $600,000. The value of the land is determined by multiplying the annual rent of $5,000 by eight. The value of the building is determined as if owned by the surcharge taxpayer.

# (c)

The term “gross rents” does not include:

# (1)

intercorporate rents if both the lessor and the lessee are properly included in a combined report under article 9-A;

# (2)

amounts payable as separate charges for water and electric service furnished by the lessor;

# (3)

amounts payable for storage, unless the storage space is designated for the surcharge taxpayer or under its control;

# (4)

amounts payable pursuant to a capital lease;

# (5)

any portion of a rental payment payable for space subleased from the surcharge taxpayer and not used by it.
(i) Example.
A surcharge taxpayer leases a building located in the MCTD, to be used in manufacturing. The rent is $20,000 a year. The taxpayer subleases 40% of the building to one or more subtenants. Since 40% of the rent paid by the taxpayer is applicable to the portion of the building subleased, 40% of the rent, or $8,000, is excluded in computing the taxpayer’s gross rent for the building, for purposes of determining the building’s average value, regardless of the actual amount of rent received by the taxpayer from the sublease.

# (d)

For purposes of this section, the term “capital lease” means any lease that meets at least one of the following:

# (1)

The present value of the minimum lease payments is 90% of the fair value of the property to the lessor.

# (2)

The lease term is 75% or more of the leased property's estimated economic life.

# (3)

The lease contains a bargain (less than fair value) purchase option.

# (4)

Ownership is transferred to the lessee by the end of the lease term.

# (e)

In exceptional cases, use of the general method described in this section may result in inaccurate valuations of rented real or tangible personal property. In such cases, any other method that properly reflects the value may be adopted either on the commissioner’s own motion or at the request of the surcharge taxpayer.
Another method of valuation may not be used unless approved by the commissioner. A request for a different method of valuation must be made in accordance with the procedures for a discretionary adjustment described in section 4-1.6 of this Subchapter and provide full information with respect to the property, including the basis for the valuation proposed by the surcharge taxpayer.