In 1977 the Carpenters Pension Trust for Southern California, through its corporate co-trustee Crocker National Bank, ground-leased two parcels on Goldenwest Street in Westminster to a partnership called Golden Westminster Specialty Center. The term ran from 15 June 1977 to 14 June 2037. Sixty years. Golden Westminster built a shopping center on the dirt and ran it for three decades. The lease let it buy the land in the 25th year or the 30th, on 60 days written notice, and by 2006 it could not afford to.[1]
So in early December 2006 the landlord and the tenant amended the lease, adding 15 years to 30 June 2052. Three weeks later the landlord sold the fee to a group that was two-thirds the same tenant, with an outside investor, Sechelt Associates, taking 25 percent. The Orange County Assessor enrolled new values of $8,624,916 and $6,625,267 against the two parcels and called it a change of ownership. The Assessment Appeals Board agreed on the law and trimmed the numbers to $13,600,000 combined. The superior court agreed too, and wrote that Golden Westminster “orchestrated the series of transactions in order to avoid losing the property."[1]
The number that decided all of it was 35, and nobody in the transaction was arguing about rent. California treats the creation of a lease of 35 years or more as a change in ownership, reappraises the entire leased premises at market value, and counts every written renewal option toward the 35. New York does the same work with a transfer tax and a line at 49 years. In both states the clause that triggers the tax is the option schedule, which tenants negotiate for reasons that have nothing to do with tax.
The options are part of the term, and there is no discretion in it. Revenue and Taxation Code section 61(c) makes a change in ownership out of the creation of a leasehold interest for a term of 35 years or longer, the termination of a leasehold that had an original term of 35 years or longer, and the transfer of a leasehold with a remaining term of 35 years or more.[2] Property Tax Rule 462.100(d) provides that the calculation of a leasehold term always includes the written renewal options, which is why the Board of Equalization’s own tax counsel dropped the phrase “including renewal options” from a 2009 memorandum as redundant.[3] A 20-year initial term with four five-year options is 40 years on the day it is signed, whether or not anyone ever exercises one. A 30-year term with a single five-year option comes to exactly 35, and the statute says 35 or more. Thirty-four years and eleven months is a term you will find in California leases for exactly this reason.[4]
The dividing line was drawn where lenders draw it. The 35-year number came out of the Report of the Task Force on Property Tax Administration, delivered to the Assembly Committee on Revenue and Taxation on 22 January 1979, which had to turn Proposition 13’s undefined phrase “change in ownership” into something an assessor could apply. The task force wanted one primary owner per parcel, because otherwise “assessors would be forced to value, and account for separate base year values for landlords and tenants on all leases.” Its reasoning for the threshold was one sentence: “Lenders will lend on the security of a lease for 35 years or longer.” Then the rule, and the part people miss: “If the term of a lease, including options to renew, is 35 years or more, the creation of the lease is a change in ownership and so is its expiration. . . . In all cases, the entire premises subject to the lease in question are reappraised."[5]
The Supreme Court decided the tenant is the owner, and meant it. In Pacific Southwest Realty Co. v. County of Los Angeles the court held that a change of ownership occurs only when the primary economic value of the land moves from one person to another, and that a lease of 35 years or more moves it to the tenant. “When the parties are sophisticated commercial entities of the type likely to sign leases for 35 or more years, such leases will often confer substantial rights on the lessee, such as the right to develop or modify capital assets, the long-term use or uses to which the land is to be put, and the like. A long-term lease may also require the lessee to pay property taxes; indeed, the lease here imposes that duty on plaintiff."[6] Part of the reason the tenant is treated as the owner, in other words, is that the lease already makes the tenant pay the taxes. The tax it then pays is the one its own lease term created.
Crossing 35 once is what costs. Crossing it a second time is free. On 27 May 2009 Matthew F. Burke, tax counsel in the Board of Equalization’s legal department, answered a question from the chief of the County-Assessed Properties Division about lease extensions, and the answer has two halves. A leasehold that was always under 35 years and then gets extended to 35 or longer is a change in ownership, because value equivalence passes from landlord to tenant for the first time. A leasehold that started at 35 or longer, drifted under 35 through the mere passage of time, and is then extended back over 35 is not, provided the extension makes no other material change to the lease.[3] Burke asked that two annotations saying otherwise, 220.0332 from 1981 and 220.0351 from 1991, be deleted, and they were, in December 2009. He added a footnote warning that the second rule could not be used to set up a tax-free sale of the fee, and that such a transaction would face the step transaction doctrine.[3]
That footnote is the case the Assessor lost. Dyanlyn Two v. County of Orange went up on exactly Burke’s warning: extend the lease to 45.5 years remaining, then sell the fee under the section 62(g) exclusion for a transfer of a lessor’s interest in property subject to a lease with 35 or more years left.[7] The Court of Appeal ran all three step transaction tests and found none of them met. The end result test failed because there was no evidence Sechelt participated in or encouraged the extension, and the extension had been made to attract any investor rather than that one. The interdependence test failed for the same reason. Presiding Justice O’Leary, writing for a panel with Justices Fybel and Ikola, reversed with directions to enter judgment for Dyanlyn, and included a line assessors should read twice: “Using the statutory exception is not automatically suspect behavior."[8] The court also declined to follow Rule 462.100(a)(2)(A), which on its face makes a change of ownership out of a sale of the fee under a lease with under 35 years remaining, because the rule does not distinguish a long-term lessee who is already the owner for tax purposes from a third party who is not.[8] One caution on how far that carries. Section 61(c)(1)(D) says the same thing the rule says, in the statute rather than in a regulation, and it has said it since at least 2010. The opinion addresses the rule and never mentions the subdivision.[2] An assessor arguing the other side of a fee sale under a short remaining term has a statute to point at that the Court of Appeal did not discuss.
Ending a long lease early is also a change in ownership. Section 61(c) catches termination as well as creation, where the leasehold had an original term of 35 years or longer.[2][3] A ground tenant who negotiates a buyout, a surrender, or a lease termination agreement out of a 50-year ground lease has handed the assessor a reappraisal event on the whole leased premises, and the base year value that comes back is 2026 market value rather than whatever 1977 number the parcel has been carrying. Nothing about that is a defect in the buyout. It is a cost that belongs in the termination payment, and it is usually discovered afterwards.
The filing obligation sits with the party that just became the owner. Section 480 requires a change in ownership statement, and section 482(a) adds a penalty of the greater of $100 or 10 percent of the taxes on the new base year value if the statement is not filed within 90 days of a written request from the assessor, capped at $20,000 for property not eligible for the homeowners’ exemption where the failure was not willful.[9] The tenant signing the 40-year lease is the transferee. It is also, in most ground leases, the party contractually obliged to pay the tax that the filing will produce.
New York prices the same thing as a transfer tax and sets the line at 49. Tax Law section 1401(e) makes the creation of a lease or sublease a taxable conveyance only where three things are all true: the term plus any renewal options exceeds 49 years, substantial capital improvements are or may be made by or for the benefit of the lessee, and the lease covers substantially all of the premises.[10] “Substantially all” is read as at least 90 percent of total rentable space, excluding common areas.[11] Miss any one element and there is no tax; hit all three and the state rate is $2 per $500 of consideration, 0.4 percent, with an extra 0.25 percent on non-residential New York City conveyances of $2,000,000 or more since 1 July 2019.[12] Inside the city the Real Property Transfer Tax runs on top at 1.425 percent up to $500,000 and 2.625 percent above it for commercial property.[13] A 30-year lease with a 30-year option is a 60-year lease for this purpose, and a build-to-suit tenant satisfies the capital improvements element by definition.
What has changed since Dyanlyn is the volume of leases long enough to matter. Bloomberg reported on 24 June 2026 that the largest cloud and hyperscale companies have pushed their future data center lease commitments past $850 billion, with Meta adding roughly $79 billion in a single quarter to reach $182.9 billion and Oracle carrying the biggest pile at about $250 billion.[14] Those are long leases on purpose, because the power and the shell take a decade to pay back, and the usual structure is a long initial term with a stack of renewal options behind it. Solar and battery land leases are long for the same reason: the project has to outlive its debt. And California’s active solar energy system exclusion under section 73 is repealed on 1 January 2027, with systems that qualified before that date staying excluded, but only “until there is a subsequent change in ownership."[15] A lease extension that crosses 35 years for the first time is a change in ownership of the real property. Whether that also ends the grandfathered exclusion on a solar system sitting on the same property is not something a court has decided. It is a bad argument to be having with an assessor in 2027 with the amendment already signed.
None of this is separate from the rest of the lease. The option schedule is the same schedule that has to be exercised on time or not at all, which is what the notice deadline in a renewal option cases are about, except that here the term length matters before anyone exercises anything. The reassessed tax lands in the operating expense or tax clause, which is where a ratchet and the audit rights that expire first already decide who eats an increase. And in a data center lease, where the tenant is paying for the power and the improvements anyway, the property tax line is the one cost nobody models against the option schedule.
Counting the term the assessor counts#
Acrebase reads the term and option provisions out of every lease in a portfolio and adds them up the way Rule 462.100(d) does, initial term plus every written renewal option, then flags each California lease at or over 35 years and each New York lease at or over 49, along with whether the New York ones also carry a tenant improvement obligation and cover 90 percent or more of the building. It does the same for the tax clause, so you can see which leases have Proposition 13 protection language excluding reassessment increases, which have it drafted to exclude a reassessment caused by the tenant’s own lease term, and which have nothing. For an owner running one national form across California, New York and everywhere else, the clause that needs a state-specific fallback is the one nobody thinks of as a tax clause. The clause library and negotiation playbook hold those fallbacks, so the California ground lease does not go out with a 40-year option stack and a tax clause that passes the consequence straight through.
If you are a landlord, add the options before you sign, not after, and decide deliberately whether you want the reassessment. Sometimes you do: if the parcel is carrying a low base year value and the tenant is paying taxes under a net lease, the reassessment is the tenant’s problem and the long term is worth it. Sometimes you do not, and then the arithmetic has to come out under 35 including the options, which usually means a shorter option stack and a promise to talk again later. Tenants do not like that trade, and it is worth knowing why you are asking for it before you ask. Say in the tax clause which party bears an increase attributable to a change in ownership under section 61(c), and say it separately from the general change-of-ownership carve-out, because the two are not the same event and a tenant who negotiated Proposition 13 protection against your sale will argue it also covers the reassessment its own lease caused. If you are a tenant, count your own options before you ask for another one. A fifth five-year option you will probably never exercise can reset the assessed value of the whole leased premises at signing, and if your lease is net you will pay for it every year of the term. Ask for the tax clause to exclude any increase in assessed value resulting from a change in ownership under section 61 or 62, name the section, and do not settle for “change in ownership of the Property,” which a landlord will later read as meaning its own sale. If you are being asked to terminate a long ground lease early, price the reappraisal into the termination payment, because the termination is the taxable event and you may be the one who pays the first year of it.
Footnotes
[1] Dyanlyn Two v. County of Orange (2015) 234 Cal.App.4th 800, No. G049269 (Cal. Ct. App., 4th Dist., Div. 3), opinion filed 30 January 2015, certified for publication 23 February 2015, on appeal from the Superior Court of Orange County, No. 30-2012-00618968, Linda S. Marks, Judge — the Golden Westminster Specialty Center at 15212 and 15300 Goldenwest Street, Westminster, Assessor’s Parcel Numbers 142-383-13 and 142-401-62; 60-year ground lease entered 1977 for a term from 15 June 1977 to 14 June 2037 with the original landlord Crocker National Bank as corporate co-trustee for Carpenters Pension Trust for Southern California; purchase options exercisable in the 25th year (2002) or the 30th year (2007) on 60 days written notice; lease amended in early December 2006 to extend the term 15 years to 30 June 2052; fee sold 28 December 2006, 25 percent to the Gail & John Sullivan Revocable Trust, 25 percent to Sechelt Associates, LP, and 50 percent to Dyanlyn Two, as tenants in common, with the grant deed and assignments recorded 29 December 2006. The Assessor enrolled $8,624,916 on one parcel ($7,129,588 land, $1,495,328 improvements) and $6,625,267 on the other ($4,460,457 land, $2,164,810 improvements); the Assessment Appeals Board ruled on 28 June 2012 that the sale was a change of ownership but reduced the values to $7,752,000 and $5,848,000, a combined $13,600,000; the trial court heard the refund action on 15 August 2013 and issued a minute order for the Assessor on 9 September 2013. https://www.courtlistener.com/opinion/2781384/dyanlyn-two-v-county-of-orange/
[2] Cal. Rev. & Tax. Code § 61(c), as amended by Stats. 2010, ch. 654, § 2 (SB 1494) — “(c)(1)(A) The creation of a leasehold interest in taxable real property for a term of 35 years or more (including renewal options). (B) The termination of a leasehold interest in taxable real property which had an original term of 35 years or more (including renewal options). (C) Any transfer of a leasehold interest having a remaining term of 35 years or more (including renewal options). (D) Any transfer of a lessor’s interest in taxable real property subject to a lease with a remaining term (including renewal options) of less than 35 years. (2) Only that portion of a property subject to that lease or transfer shall be considered to have undergone a change in ownership.” Subparagraph (D) is the statutory counterpart of Rule 462.100(a)(2)(A), which the Court of Appeal declined to follow in Dyanlyn Two; the opinion discusses the rule and does not mention the subdivision. https://leginfo.legislature.ca.gov/faces/codes_displaySection.xhtml?lawCode=RTC§ionNum=61
[3] California State Board of Equalization, Legal Department, Memorandum from Matthew F. Burke, Tax Counsel, to Dean Kinnee, Chief, County-Assessed Properties Division, “Change in Ownership - Lease Extensions,” Assignment No. 09-047, 27 May 2009, published as Property Tax Annotation 220.0357 — “You ask whether the mere extension of a leasehold that was originally for a term shorter than 35 years, to a new leasehold period of 35 years or longer, results in a change in ownership. It is our opinion that this would result in a change in ownership.” And: “the mere extension of a leasehold that was originally for a term of 35 years or longer, at a time when the remaining term on such leasehold is less than 35 years through the mere passage of time, to a new leasehold term once again with a term 35 years or longer . . . would not result in a change in ownership if there were no other material changes in the terms of the lease made by the lease extension.” Footnote 3 of the memorandum: “Because Property Tax Rule 462.100, subdivision (d), provides that the calculation of a leasehold term always includes the written renewal options, we have chosen throughout this memorandum to omit the ‘including renewal options’ language.” The memorandum requests deletion of Annotations 220.0332 (13 July 1981; 9 December 1988) and 220.0351 (24 December 1991), which had reached the opposite result on the second question; both were deleted in December 2009. A footnote cautions that the opinion “may not be interpreted to suggest that a lease extension under this specific situation could be entered into with the intent of avoiding a reassessment upon a sale of the underlying fee interest in the property by the lessor,” and that such a transaction would face the step transaction doctrine as applied in Shuwa Investments Corp. v. County of Los Angeles (1991) 1 Cal.App.4th 1635. https://www.boe.ca.gov/proptaxes/pdf/220_0357.pdf
[4] Cox, Castle & Nicholson, “35 Years Can Be Taxing on A Landlord: The California Property Tax Implications of Leases of 35 Years Or Longer” — noting that a change in ownership occurs on the creation of a leasehold interest for a term of 35 years or more including renewal options, that “the extension of a lease with an original term (including renewal options) of less than 35 years to a term of more than 35 years would constitute a ‘change in ownership,’” that only the leased premises and not the surrounding property is reassessed, that the reassessed value includes both the tenant’s leasehold and the landlord’s reversionary interest at current market value, and that landlords commonly draft terms of 34 years 11 months to stay under the threshold. https://www.coxcastle.com/publication-35-years-can-be-taxing-on-a-landlord-the-california-property-tax-implications-of-leases-of-35-years-or-longer
[5] Report of the Task Force on Property Tax Administration, submitted to the Assembly Committee on Revenue and Taxation, 22 January 1979, at pp. 39-41, quoted in Dyanlyn Two, 234 Cal.App.4th 800, of which the Court of Appeal took judicial notice on its own motion — “Often two or more people have interests in a single parcel of real property. Leases are a good example. The landlord owns the reversion; the tenant, the leasehold interest. . . . Otherwise assessors would be forced to value, and account for separate base year values for landlords and tenants on all leases, and for other forms of split ownership.” And at p. 41: “Lenders will lend on the security of a lease for 35 years or longer. Thus, 35 years was adopted as the concrete dividing line. If the term of a lease, including options to renew, is 35 years or more, the creation of the lease is a change in ownership and so is its expiration. If a lessee under such a lease assigns or sublets for a term of 35 years or more, that is another change in ownership. However, if the lease, including options, is for less than 35 years the lessor remains the owner and only the transfer of his interest is a change. In all cases, the entire premises subject to the lease in question are reappraised.” Section 60 defines change in ownership as “a transfer of a present interest in real property, including the beneficial use thereof, the value of which is substantially equal to the value of the fee interest,” the three elements being present interest, beneficial ownership and value equivalence. https://www.courtlistener.com/opinion/2781384/dyanlyn-two-v-county-of-orange/
[6] Pacific Southwest Realty Co. v. County of Los Angeles (1991) 1 Cal.4th 155, at pp. 167-168, quoted in Dyanlyn Two, 234 Cal.App.4th 800 — “a change of ownership occurs only when the primary economic value of the land is transferred from one person to another”; and “When parties enter into a lease they create the legal relationship that governs their respective rights in the land, and either’s successor in interest will be bound thereby. When the parties are sophisticated commercial entities of the type likely to sign leases for 35 or more years, such leases will often confer substantial rights on the lessee, such as the right to develop or modify capital assets, the long-term use or uses to which the land is to be put, and the like. A long-term lease may also require the lessee to pay property taxes; indeed, the lease here imposes that duty on plaintiff. In sum, the primary economic value of land encumbered by a lease of such duration rests with the lessee; the lessor’s rights as a practical matter are limited to receiving rental payments under a relationship the terms of which are fixed by prior agreement for a time substantially equivalent to the duration of a fee.” The court also warned that a contrary rule “could result in an enormous tax increase for a lessee that has erected major capital improvements on the land and whose lease requires the lessee to pay property taxes,” from “a transfer over which the lessee has no control.” https://www.courtlistener.com/opinion/2781384/dyanlyn-two-v-county-of-orange/
[7] Cal. Rev. & Tax. Code § 62(g) — a change in ownership shall not include “Any transfer of a lessor’s interest in taxable real property subject to a lease with a remaining term (including renewal options) of 35 years or more.” Property Tax Rule 462.100(b)(2)(A) states the same exclusion and adds the phrase “whether to the lessee or another party”; the Court of Appeal in Dyanlyn Two held the Board’s broader reading correct. https://leginfo.legislature.ca.gov/faces/codes_displaySection.xhtml?lawCode=RTC§ionNum=62
[8] Dyanlyn Two v. County of Orange (2015) 234 Cal.App.4th 800, O’Leary, P.J., with Fybel and Ikola, JJ., concurring — the three step transaction tests are the end result test, the interdependence test and the binding commitment test, taken from Shuwa Investments Corp. v. County of Los Angeles (1991) 1 Cal.App.4th 1635, 1648-1649, with McMillin-BCED/Miramar Ranch North v. County of San Diego (1995) 31 Cal.App.4th 545, 556, holding that only one test need be satisfied. The court found the end result test inapplicable because “[t]here is no evidence Sechelt participated in or encouraged the lease extension” and “the lease was lengthened to attract any new investor, not specifically Sechelt,” and the interdependence test inapplicable on the same facts. On Rule 462.100(a)(2)(A): “We find this rule is problematic because it is not in sync with the case authority or the Advisory Opinion. . . . We are not bound to follow administrative rules, and for purposes of this appeal, we will not.” And: “Using the statutory exception is not automatically suspect behavior.” Judgment reversed and remanded with directions to enter judgment for Dyanlyn, appellants to recover costs on appeal; publication requested by the Law Offices of Ajalat, Polley, Ayoob & Matarese and granted 23 February 2015. https://www.courtlistener.com/opinion/2781384/dyanlyn-two-v-county-of-orange/
[9] Cal. Rev. & Tax. Code §§ 480, 482 — section 482(a): “If a person or legal entity required to file a statement described in Section 480 fails to do so within 90 days from the date a written request is mailed by the assessor, a penalty of either: (A) one hundred dollars ($100), or (B) 10 percent of the taxes applicable to the new base year value reflecting the change in ownership of the real property . . . whichever is greater, but not to exceed five thousand dollars ($5,000) if the property is eligible for the homeowners’ exemption or twenty thousand dollars ($20,000) if the property is not eligible for the homeowners’ exemption if the failure to file was not willful, shall . . . be added to the assessment made on the roll.” Section 482(b) applies a flat 10 percent penalty to entity-level changes in control reportable under sections 480.1 and 480.2. https://codes.findlaw.com/ca/revenue-and-taxation-code/rtc-sect-482/
[10] N.Y. Tax Law § 1401(e) — the creation of a leasehold or sublease is a conveyance only where “(a) the sum of the term of the lease or sublease and any options for renewal exceeds forty-nine years, (b) substantial capital improvements are or may be made by or for the benefit of the lessee or sublessee, and (c) the lease or sublease is for substantially all of the premises constituting the real property.” https://www.nysenate.gov/legislation/laws/TAX/1401
[11] Louis Vlahos, “Where New York State and City Transfer Taxes Meet: Does A Lease Make Sense?”, Tax Law for the Closely Held Business, February 2020 — describing the three-element test under Tax Law § 1401(e), reading “substantially all” as at least 90 percent of the total rentable space of the premises exclusive of common areas, and giving the worked example that a 30-year lease with no renewal option is not a taxable conveyance while a 30-year lease with a 30-year renewal option is treated as a 60-year lease and is. https://www.taxlawforchb.com/2020/02/where-new-york-state-and-city-transfer-taxes-meet-does-a-lease-make-sense/
[12] N.Y. Tax Law § 1402 — base real estate transfer tax of $2 for each $500 of consideration or fractional part thereof, that is 0.4 percent, on conveyances where the consideration exceeds $500; an additional 0.25 percent applies to conveyances in a city with a population of one million or more of residential property where the consideration is $3,000,000 or more and of any other property where the consideration is $2,000,000 or more, effective for transfers on or after 1 July 2019. https://www.tax.ny.gov/bus/transfer/rptidx.htm
[13] New York City Department of Finance, Real Property Transfer Tax — for commercial property, including all property other than one to three family houses, individual residential condominium units and individual co-op apartments, the rate is 1.425 percent where the consideration is $500,000 or less and 2.625 percent where it is more than $500,000. https://www.nyc.gov/site/finance/property/property-real-property-transfer-tax-rptt.page
[14] Bloomberg, “Meta, Microsoft Lead $850 Billion Boom in Data Center Leases” (24 June 2026), analysing quarterly regulatory filings — aggregate future data center lease commitments of the largest cloud and hyperscale companies above $850 billion, Meta adding roughly $79 billion in the quarter to reach $182.9 billion of future lease obligations, and Oracle holding the largest single total at approximately $250 billion, with the obligations generally running out over about the next two decades. https://www.bloomberg.com/news/articles/2026-06-24/meta-microsoft-lead-850-billion-boom-in-data-center-leases
[15] Cal. Rev. & Tax. Code § 73 — the active solar energy system new construction exclusion applies to lien dates for the 1999-2000 fiscal year through the 2025-26 fiscal year, the section remains in effect only until 1 January 2027 and is repealed as of that date, and active solar energy systems that qualified for the exclusion before 1 January 2027 “shall continue to be excluded on and after January 1, 2027, until there is a subsequent change in ownership.” https://codes.findlaw.com/ca/revenue-and-taxation-code/rtc-sect-73/
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