Date: 07-20-2018

Case Style: Time Warner Cable, Inc. v. County of Los Angeles

Case Number: B270062

Judge: Johnson

Court: California Court of Appeals Second Appellate District Division One on appeal from the Superior Court, Los Angeles County

Plaintiff's Attorney: Mary C. Wickham, Albert Ramseyer, and Elizabeth G. Chilton

Defendant's Attorney: Douglas Mo

Description: 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.
3
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.
4
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.)
6
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.
9
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.
10
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.
12
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
13
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-
14
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
15
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
16
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
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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.

Outcome: 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.

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