Time Warner Cable, Inc. v. County of Los Angeles

Time Warner Cable (Time Warner) operates a cable system

that uses public rights-of-way in Los Angeles to provide cable

television,1 broadband, and telephone services. Time Warner

initially only provided television services. Once changing

technologies enabled broadband and telephone services to be

delivered over cable rights-of-way, Time Warner and many other

cable operators began to provide their customers broadband and

telephone services over these same rights-of-way.

Time Warner’s right to use the public rights-of-way and to

conduct business as a television cable operator are conferred via

cable television franchise agreements with numerous local

franchising authorities. The right to use the public rights-of-way

(the possessory interest) is a taxable interest; the right to do

business as a cable operator is not. The fee for these franchises

is, by federal law, limited to no more than five percent of revenue

generated from the provision of television services only.2 Federal

law also prohibits local franchising authorities from granting

exclusive franchises.

The issues before us stem from a dispute between the

parties as to how the County of Los Angeles (the County) may tax

Time Warner’s possessory interests. The trial court found that

the Assessor of the County of Los Angeles (the Assessor) may tax

the possessory interests only on the franchise fee because anyone

can obtain an identical franchise for five percent of television



1 For simplicity, we will use the term television to describe

that aspect of Time Warner’s service, which includes its various

video services.

2 Time Warner pays its franchise fees to the local

franchising authorities annually.

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revenue. We disagree, as we find no legal restriction on the

County valuing the possessory interests in providing all three

services. We agree with the trial court that the Assessor’s

valuation was not supported by substantial evidence. We agree

with the trial court that the County erred in taxing the entire five

percent of revenue rather than the value of the possessory

interests alone. We also agree with the trial court that

substantial evidence supported the Los Angeles County

Assessment Appeals Board’s (the Board) finding that the

reasonably anticipated term of possession of Time Warner’s

rights-of-way was 10 years.

Accordingly, we affirm in part and reverse in part.

BACKGROUND

On January 1, 2005, Time Warner was party to 13

franchise agreements with public entities in the County. Each

franchise included both a right to maintain wires and

appurtenances—the distribution plant—on public rights-of-way

(the possessory interest) and a right to provide cable services to

subscribers. On July 31, 2006, Time Warner purchased the

assets of Comcast and Adelphia, which included 77 additional

franchises.3 Each franchise was originally granted for a 10-year

term, but as of the assessment years of 2005 to 2008, each had

fewer than 10 years remaining. Further, it was undisputed that

pursuant to the Digital Infrastructure and Video Competition Act

of 2006, Public Utilities Code section 5800 et seq. (DIVCA), the

franchising authority for cable television systems would be



3 We will refer to Time Warner’s pre-owned and newlyacquired

possessory interests as legacy and acquired interests,

respectively.

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reassigned to the California Public Utilities Commission as of

January 2, 2008.

Time Warner’s acquisition of Comcast’s and Adelphia’s

assets triggered a Proposition 13 reassessment of the newlyacquired

possessory interests to determine their “base year”

value, i.e., the value upon which current and future tax

assessments would based. At the same time, Time Warner

sought to reduce the property tax assessment of its legacy

interests, contending they declined below the roll value. Time

Warner thus initiated proceedings before the Board to dispute

the value of the legacy interests.4

Eleven days before the commencement of the Board

proceedings, the Assessor sent notice of his intent to augment the

values of the possessory interests. Time Warner paid the

resulting taxes then instituted refund proceedings before the

Board to contest the Assessor’s valuation. The Board found

against Time Warner on all grounds. Time Warner then filed the

instant action in the superior court.

The trial court reversed the Board’s decision to uphold the

Assessor’s valuation of Time Warner’s possessory interests based

on television, broadband, and telephony revenue. The court

reversed the Board’s finding that five percent of broadband and

telephone revenue represented the fair market value of the

possessory interest in providing these services. The court also

reversed the Board’s determination that the Assessor could tax

the full five percent of revenue rather than the portion of

economic rent attributable to Time Warner’s possessory interests.



4 Time Warner’s challenge to the County’s valuation of its

legacy interests is not a subject of this appeal.

5

The court upheld the Assessor’s use of a 10-year term in valuing

Time Warner’s acquired possessory interests, finding substantial

evidence supported the Board’s conclusion that Time Warner’s

acquired franchises would be renewed.

DISCUSSION

A. Burden of proof

In this case, the Assessor bore the burden of proof on all

valuation issues. Ordinarily, when the taxpayer appeals a

property tax assessment, he or she has the burden of proving that

the value on the assessment roll is incorrect, or that the property

in question has been incorrectly assessed. (Cal. Code Regs.,

tit. 18, § 321.) However where, as in this case, the assessor gives

notice that he intends to seek a higher value than the one placed

on the assessment roll, the burden shifts to the assessor to prove

the higher value. (Cal. Code Regs., tit. 18, § 313, subd. (f).)

B. Standard of review

“ ‘Where a taxpayer challenges the validity of the valuation

method used by an assessor, the trial court must determine as a

matter of law “whether the challenged method of valuation is

arbitrary, in excess of discretion, or in violation of the standards

prescribed by law.” [Citation.] Our review of such a question is

de novo.’ ” (Charter Communications Properties, LLC v. County

of San Luis Obispo (2011) 198 Cal.App.4th 1089, 1101.)

“ ‘[W]here the taxpayer challenges the application of a valid

valuation method, the trial court must review the record

presented to the Board to determine whether the Board's findings

are supported by substantial evidence but may not independently

weigh the evidence. [Citations.] This court . . . reviews a

challenge to application of a valuation method under the

substantial evidence rule.’ ” (Ibid., italics added.)

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We therefore review the Assessor’s choice of valuation

method de novo, and the resulting valuation itself for substantial

evidence.

C. General legal principles

Before turning to the issues in dispute between the County

and Time Warner, we briefly summarize basic legal principles

relevant to cable television franchising and the taxation of

possessory interests.

1. Cable television franchising

Time Warner provides cable television, broadband, and

telephone services through a “[m]ixed-[u]se” cable network.

(In the Matter of Implementation of Section 621(a)(1) of the Cable

Communications Policy Act of 1984 As Amended by the Cable

Television Consumer Prot. & Competition Act of 1992 (2007) 22

F.C.C. Rcd. 5101, 5155.) Federal law sets the maximum

franchise fee a local franchising authority can collect at five

percent of revenue from cable services. (47 U.S.C. § 542(b).)

Under federal law, “cable service” only includes television and

related video services, and revenue generated from broadband

and telephone services cannot be included in the calculation of

“gross revenue” for the purpose of determining the franchise fee.

(47 U.S.C. §§ 542(b), 522(6).) In addition, federal law prohibits

local franchising authorities from “unreasonably refus[ing] to

award an additional competitive franchise.” (47 U.S.C.

§ 541(a)(1).) Thus, franchising authorities are prohibited from

granting an exclusive franchise to any prospective cable

television operator.

2. Taxation of possessory interests

Unless exempt, all property is taxable in proportion to its

“full value.” (Cal. Const., art. XIII, § 1; Rev. & Tax. Code, § 201.)

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“ ‘Property’ includes all matters and things, real, personal, and

mixed, capable of private ownership.” (Rev. & Tax. Code, § 103.)

Real property includes a possessory interest in land, including a

cable company’s right-of-way granted by a public entity. (Rev. &

Tax. Code, §§ 104, 107; American Airlines, Inc. v. County of Los

Angeles (1976) 65 Cal.App.3d 325, 328–329; Cox Cable San Diego,

Inc. v. County of San Diego (1986) 185 Cal.App.3d 368, 378.)

However, the right to engage in business as a cable service

provider is not an assessable property interest. (County of

Stanislaus v. Assessment Appeals Bd. (1989) 213 Cal.App.3d

1445, 1452.)

Full value means “ ‘full cash value’ or ‘fair market

value[,]’ . . . the amount of cash or its equivalent that property

would bring if exposed for sale in the open market under

conditions in which neither buyer nor seller could take advantage

of the exigencies of the other, and both the buyer and the seller

have knowledge of all of the uses and purposes to which the

property is adapted and for which it is capable of being used, and

of the enforceable restrictions upon those uses and purposes.”

(Rev. & Tax. Code, § 110, subd. (a).) Property is therefore

assessed based on how a hypothetical purchaser in an open and

competitive market would value the property, including the

normal uses to which the purchaser could put it and the

enforceable restrictions upon those uses.

The methods for valuing a possessory interest granted to a

cable television operator via franchise “shall include, but not be

limited to, the comparable sales method, the income method

(including, but not limited to, capitalizing rent), or the cost

method.” (Rev. & Tax. Code, § 107.7, subd. (a).) Under the

income approach, the assessor “values an income property by

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computing the present worth of a future income stream.” (Cal.

Code Regs., tit. 18, § 8, subd. (b).) The preferred method of

valuing cable television possessory interests is by capitalizing the

annual rent, which is “that portion of the franchise fee received

that is determined to be payment for the cable possessory

interest . . . or the appropriate economic rent.” (Rev. & Tax.

Code, § 107.7, subd. (b)(2).) “Economic rent” is the estimated

amount a prospective buyer would pay on the valuation date for

the real property rights provided by the taxable possessory

interest. (Cal. Code Regs., tit. 18, § 21, subd. (a)(8).) “If the

assessor does not use a portion of the franchise fee as economic

rent, the resulting assessments shall not benefit from any

presumption of correctness.” (Rev. & Tax. Code, § 107.7,

subd. (b)(2).) Nothing in the law prohibits the assessor from

using alternative valuation methods; the law merely deprives the

county of the benefit of a presumption of correctness if it chooses

not to value the interest by capitalizing a portion of the franchise

fee.

D. Merits

This case presents four issues. The first issue is whether

the Assessor may include revenue from broadband and telephone

service in valuing the possessory interests. The second issue is

whether substantial evidence supported the Assessor’s valuation.

The third is whether the Assessor erred by failing to allocate

some portion of the economic rent to the intangible assets of Time

Warner’s cable system. The final issue is whether the Assessor

properly assumed a 10-year term of possession with respect to 49

of Time Warner’s acquired possessory interests.

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1. The Assessor may include revenue from

broadband and telephone service in valuing the possessory

interests

The trial court ruled that the Assessor may only value

Time Warner’s possessory interests by capitalizing a portion of

the franchise fee. We disagree.

The Assessor determined that the economic rent of the

possessory interests should be based on revenue from all three

income streams: television, broadband, and telephone services.

With respect to television service, the Assessor taxed the

franchise fee. With respect to broadband and telephone services,

the Assessor calculated the value of the possessory interests as a

percentage of gross revenue from these two income streams.

None of the parties dispute that capitalizing a portion of the

franchise fee is the appropriate way to value the possessory

interests in providing television service. The dispute lies in

whether the County can also value and tax the possessory

interests in providing broadband and cable services.

Time Warner argues that the Assessor erred in valuing the

possessory interests based all three income streams: television,

broadband, and telephone. Time Warner asserts that, because

the possessory interests are available in inexhaustible supply to

any prospective cable operator at five percent of television

revenue, the only way to calculate the fair market value of the

possessory interests is by capitalizing a portion of the franchise

fee. The trial court agreed with Time Warner, reasoning that no

prospective cable operator would pay more than five percent of

television revenue to Time Warner for any possessory interest

because the exact same interest could be purchased from the

County at that price.

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The County contends that the trial court overlooked the

fact that there is no actual, working market for cable possessory

interests. According to the County, prospective cable operators

do not go to the franchising authority, obtain a franchise, and

then build cable systems from the ground up. Instead, the

County argued, prospective cable operators “buy existing

systems” because the capital costs are excessive relative to the

riskiness of the potential return. The County therefore argues

that the value of the possessory interests are not accurately

captured by capitalizing the franchise fee; instead, their value is

based on the economic rent the possessory interests would

command in a rational market.

Time Warner does not argue that prospective cable

operators were purchasing new franchises, nor have they

provided any evidence demonstrating there was an actual,

working market for cable television possessory interests during

the assessment period.

The subject possessory interests generate a considerable

amount of revenue for Time Warner beyond what they receive

from providing television services, and we find no legal restriction

on the County assessing property taxes on this added value.

Accordingly, we conclude that the added value that Time Warner

enjoys by using the possessory interests to provide telephone and

broadband services is not beyond the reach of property tax

assessment. After all, it is “well settled that ‘the absence of an

“actual market” for a particular type of property does not mean

that it has no value or that it may escape from the constitutional

mandate that “all property . . . shall be taxed in proportion to its

value” (Art. XIII, § 1) but only that the assessor must then use

such pertinent factors as replacement costs and income analyses

11

for determining “valuation.” ’ ” (De Luz Homes, Inc. v. County of

San Diego (1955) 45 Cal.2d 546, 563.)

Given that there is no evidence of an open and competitive

market for Time Warner’s possessory interests during the

assessment period, we find no error with the Assessor’s valuation

method. We therefore reverse the trial court’s ruling that the

Assessor can only value the possessory interests by capitalizing

the franchise fee.

2. The Assessor’s valuation was not supported by

substantial evidence

The trial court found that no substantial evidence

supported the Board’s finding that five percent of gross revenue

from broadband and telephone represented the fair market value

of the possessory interests in providing these services. We agree.

According to the County, the Assessor based its valuation

on “the current franchise fee for the use of public rights-of-way to

provide cable television service, the fee structure that applied to

cable modem revenues prior to March 2002, and the similarity in

the manner in which the [s]ubject rights-of-way are used for cable

television, telephone, and broadband services.” The Assessor

reasoned that since industry pays five percent of television

revenue for the possessory interest to provide television service,5

“it is reasonable to expect that a similar percentage rent would

apply” for the use of the possessory interests to provide



5 As discussed below, the Assessor is not necessarily correct

that industry pays five percent of television revenue for the

possessory interest. Industry pays five percent of revenue for the

franchise, which includes both the possessory interest and the

right to do business. Thus, it is likely that industry pays less

than five percent for the possessory interest.

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broadband and telephone services “were [the possessory

interests] exchanged in an open and competitive market.”

The only evidence the County provided to support the

Assessor’s reasoning that the three services should be treated

equally is a statement in Time Warner’s 2007 annual report

submitted to the Security and Exchange Commission indicating

that prior to 2002, Time Warner may have paid a franchise fee on

revenue from cable modem service.

The mere fact that Time Warner may have paid a franchise

fee to provide cable modem services prior to 2002—without

more—is not substantial evidence that the fair market value of

the possessory interests was five percent of revenue from all

three income streams. In addition, neither the Assessor nor the

County described the purported similarities in the way

possessory interests are used to provide television, broadband,

and telephone services. The County merely issues the conclusory

statement that the Assessor “considered” the “similarity

in . . . manner” in which the possessory interests are used to

deliver all three services.

As Time Warner points out, the television, broadband, and

television businesses do not operate in similar competitive

environments. The more competition a business faces, the lower

its value to a prospective purchaser, and the County has failed to

make a showing that these three businesses faced levels of

competition similar enough to warrant valuing them equally.

Accordingly, we conclude that on this record no substantial

evidence supported the Assessor’s determination that five percent

of gross income from all three income streams represented the

fair market value of the possessory interests during the relevant

time period. The proceedings must therefore be remanded to the

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Board to determine the value of the possessory interests in

providing broadband and telephone services, and the taxes

thereon.

3. The Assessor erred by failing to allocate some

portion of the economic rent to the intangible assets of the

cable systems

Time Warner contends the Assessor erred in determining

that the entire five percent of revenue constituted the measure of

taxable value. We agree.

Intangible assets and rights are exempt from property

taxation, and “the value of intangible assets and rights shall not

enhance or be reflected in the value of taxable property.” (Rev. &

Tax. Code, § 212, subd. (c).) As such, in assessing the fair market

value of a cable television’s possessory interests, “[i]ntangible

assets or rights of a cable system or the provider of video services

are not subject to ad valorem property taxation.” (Rev. & Tax.

Code, § 107.7, subd. (d).) Intangible assets or rights of a cable

system include, but are not limited to: “franchises or licenses to

construct, operate, and maintain a cable system or video service

system for a specified franchise term (excepting therefrom that

portion of the franchise or license which grants the possessory

interest); subscribers, marketing, and programming contracts;

nonreal property lease agreements; management and operating

systems; a workforce in place; going concern value; deferred,

startup, or prematurity costs; covenants not to compete; and

goodwill.” (Rev. & Tax. Code, § 107.7, subd. (d).)

“The right to do business has been recognized as an

intangible asset exempt from property taxation.” (Shubat v.

Sutter County Assessment Appeals Bd. (1993) 13 Cal.App.4th 794,

802.) Accordingly, Time Warner’s right to use the public rights-

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of-way to build and maintain its cable network is subject to

property tax; however, its “right to charge a fee and to make a

profit from the operation of the business is a constitutionally

protected nontaxable asset.” (County of Stanislaus v. Assessment

Appeals Bd., supra, 213 Cal.App.3d at p. 1449.)

Although a cable television operator’s right to do business

is exempt from ad valorem property taxation, the right to use and

maintain the public rights-of-way to operate the network “may be

assessed and valued by assuming the presence of intangible

assets or rights necessary to put the . . . possessory interest to

beneficial or productive use in an operating cable [television]

system.” (Rev. & Tax. Code, § 107.7, subd. (d).) Thus, while the

right to do business cannot be directly taxed, the assessor may, in

valuing the right to use the public-rights-of-way, “take into

consideration the presence of the intangible assets necessary to

put the possessory interest to beneficial or productive use in the

operation of the cable television system.” (County of Stanislaus v.

Assessment Appeals Bd., supra, 213 Cal.App.3d at p. 1449.)

With respect to television services, the Assessor testified

that he did not apportion the franchise fee between the tangible

and intangible rights. In his testimony before the Board, the

Assessor initially disagreed that Revenue and Taxation Code

section 107.7, subdivision (d) precluded him from taxing Time

Warner’s intangible assets. However, he shortly thereafter

agreed that “business intangibles are not to be assessed.” In any

event, the Assessor taxed the “full portion” of the franchise fee

rather than allocating a portion to the intangible right to do

business.

With respect to the provision of broadband and telephone

services, there is no evidence in the record that the Assessor

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distinguished between the intangible and tangible assets when

calculating the economic rent of the possessory interests for these

purposes. Nor have the parties offered argument on the issue.

We therefore conclude that the Assessor erred by failing to

allocate some portion of the economic rent to the intangible assets

of Time Warner’s cable system before taxing the possessory

interests.

4. Substantial evidence supported the Assessor’s

use of a 10-year term of possession

Time Warner contends the trial court erred in affirming the

Assessor’s valuation of its acquired franchises as if they had

10 years to run, where it was undisputed that they all had fewer

than 10 years remaining, and in any event would soon be

supplanted by DIVCA. We disagree.

To arrive at the fair market value of a possessory interest,

an assessor must determine the actual or reasonably anticipated

term of possession. (See Rev. & Tax. Code, § 107.7, subd. (b)(1)

[pertaining to valuation of cable television franchises].) “ ‘The

term of possession is a significant variable in possessory interest

valuation, and the assessor reviews it on each lien, or valuation,

date.’ . . . ‘[T]he greater [the] number of years in a term of

possession, the greater the present value; fewer years result[ ] in

a lower present value.’ ” (Charter Communications Properties,

LLC v. County of San Luis Obispo, supra, 198 Cal.App.4th at

pp. 1099–1100.)

Section 21 of title 18 of the California Code of Regulations

sets forth Property Tax Rule 21, which provides that “[t]he term

of possession for valuation purposes shall be the reasonably

anticipated term of possession.” (Cal. Code Regs., tit. 18, § 21,

subd. (d)(1).) The reasonably anticipated term of possession of

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an asset may be different from the agreed term if clear and

convincing evidence demonstrates “that the public owner and the

private possessor have reached a mutual understanding or

agreement, whether or not in writing,” that the actual term

would be longer or shorter than the agreed term. (Cal. Code

Regs., tit. 18, § 21, subd. (d)(1).) The parties are deemed to

incorporate the effect of applicable law as part of their

understanding.

Here, the remaining term of possession for 49 of Time

Warner’s acquired franchises was less than 10 years. (The other

acquired franchises had already expired by the time Time

Warner acquired them.) The average remaining term was five

years, and many of the franchises had fewer than 10 months

remaining.

Substantial evidence supported the Board’s finding that the

parties understood the reasonably anticipated term of Time

Warner’s possessory interests was 10 years. First, Time Warner

acknowledged that when it took possession of its acquired

franchises they had no telephone operations, which it

subsequently initiated on those parcels “from scratch.” A

reasonable investor would not undertake such a significant

investment unless it intended to extend its franchise beyond the

stated term. Second, Fern Taylor, the County’s chief of policy

and planning for telecommunications, testified that since 1980,

no cable franchise has been terminated for cause or denied

renewal. And, federal law sharply restricts the grounds upon

which a franchisor may deny renewal of the franchise. For

example, section 546 of title 47 of the United States Code

provides that renewal may be denied only if the franchisee

breaches the franchise agreement or applicable law, fails to

17

provide reasonable services, or is unable to continue providing

service. (47 U.S.C. 546(d).)

These circumstances constitute substantial evidence that

Time Warner and the franchisors understood that the acquired

franchises would last as long as Time Warner wanted them to.

As the trial court found, “[t]o reduce the terms’ length for

valuation purposes would be to completely ignore the near

certainty that the franchise[s would] be renewed.”

Time Warner does not dispute this reasoning. It

acknowledges that all parties understood that even after DIVCA

it would continue to operate its business under the new, state

franchise issued under the aegis of DIVCA. However, Time

Warner argues, a state franchise under DIVCA would involve

different parties and different agreements conveying different

possessory interests. Therefore, it argues, Property Tax Rule 21

cannot apply because it would be impossible for any current

public owner to reach an unstated understanding as to the

reasonably anticipated term of possession under a current

agreement. The argument is without merit.

“ ‘Possession’ of real property means . . . actual physical

occupation of the property pursuant to rights not granted to the

general public.” (Cal. Code Regs., tit. 18, § 20, subd. (c)(2).)

“[P]ossession for valuation purposes” means “the reasonably

anticipated term of possession.” (Cal. Code Regs., tit. 18, § 21,

subd. (d)(1).) Time Warner acknowledges that all parties

implicitly understood that it would physically occupy its rights-ofway

for as long as it chose to do so, notwithstanding the

anticipated change from local to state control.

It is undisputed that, by law, the Public Utilities

Commission will charge Time Warner the same fee for the same

18

rights over the same length of time as any local authority. (Pub.

Util. Code, §§ 5840, subd. (q), 5850, subd. (a).) No rational seller

in an open market would accept a lesser sum than this fee in

exchange for its cable service rights-of-way just because after

DIVCA, those interests would be administered by the commission

rather than a local authority.

We reverse the trial court’s order directing the Board to value the possessory interests based only on five percent of cable television revenue. In all other respects, the judgment is affirmed. The matter is remanded to the trial court with directions to remand the matter to the Board. Consistent with this opinion, the Board shall determine the value of the possessory interests in

providing broadband and telephone services, and shall allocate some portion of the economic rent to the intangible rights and assets of Time Warner’s cable system. The parties are to bear their own costs on appeal.