Was an off-balance-sheet headquarters lease a taxable real-property lease or a mortgage financing arrangement?

Plain-English summary

Florida treated the headquarters transaction as mortgage financing rather than a taxable lease of real property. The label on the lease did not control because the Department examined the trust, participation, credit, security, agency, and lease agreements together.

The trust existed only to acquire and hold title for financing participants. Basic rent equaled interest on borrowed funds plus the promised yield to investors, not fair-market rent. The lessee paid all operating costs, maintained insurance and the property, bore all risk of loss, and generally owed the financing balance or termination value when the arrangement ended.

The documents stated that, except for financial accounting, the lessee would be treated as owner and the arrangement as financing. They also granted the owner-trustee a lien, security interest, mortgage, and deed of trust. Payments therefore were not taxable rent under section 212.031.

What this means for you

Florida looked to economic substance and the complete document set. Single-purpose title holding, financing-based payments, ownership burdens, loss allocation, and repayment obligations supported mortgage treatment.

Common questions

Q: Did calling the document a lease make payments taxable? No.

Q: Who bore operating expenses and risk of loss? The lessee.

Q: How was basic rent calculated? By the trustee's borrowing interest plus investor yield.

Q: Did the ruling decide documentary stamp or intangible tax? No.

Citations and references

• Fla. Stat. § 212.031(1)(a) — tax on renting, leasing, or licensing real property
• Fla. Stat. § 697.01(1) — instruments intended to secure payment treated as mortgages
• Bridgestone/Firestone, Inc. v. Department of Revenue, DOAH Case No. 92-2483, 15 FALR 4874 (1993) — substance-over-label financing analysis
• Fla. Stat. § 213.22 — Technical Assistance Advisements

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 00A-001

Original ruling text

SUMMARY

QUESTION: Does a set of agreements entered into in
connection with the acquisition or improvement of real
property constitute a lease of the property or a mortgage
financing arrangement?

ANSWER - Based on Facts Below: The set of agreements, even
though one agreement is designated a "lease," constitute a
mortgage financing arrangement when all agreements are
considered together. Some of the relevant factors
considered were that the "lessor" was a single purpose
financing entity, the parties structured the transaction as
a lease in order to secure "off-balance sheet" financing,
the lessee bore all risk of loss, and the rent charged was
not a fair market rent, but rather, equaled the rate of
interest charged on funds borrowed by the lessor.

Jan 11, 2000

Re: Technical Assistance Advisement 00A-001
Sales & Use Tax - Financing Lease Agreement
Sections 212.031(1)(a); 697.01(1), F.S.
XXX("Lessee")
F.E.I. # XX
XXX("Guarantor")
F.E.I. # XX
XXX ("Agent")
XXX, National Association, not individually, but Solely as
Owner-Trustee under the XXX 1999-1 ("The Trust")

Dear :

This is in response to your letter dated XX, requesting the
issuance of a Technical Assistance Advisement ("TAA") concerning
the above referenced parties and matter. Your letter has been
carefully examined, and the Department finds it to be in
compliance with the requisite criteria set forth in Chapter 12-

11, F.A.C. This response to your request constitutes a TAA and
is issued to you under the authority of section 213.22, F.S.

Advisements Requested

You have requested our advisement that the Lease Agreement
entered into by Lessee and Owner Trustee, when considered with
other relevant agreements pertaining to the same transaction,
constitutes a financing arrangement, rather than a lease or
rental arrangement, and accordingly, payments made pursuant to
the Lease Agreement are not subject to sales tax under section
212.031, F.S.

Discussion of Facts

The facts set forth in your letter may be summarized as the
following. Lessee wishes to acquire a developed parcel of land
located in Hillsborough County, Florida, to be used by Lessee as
a headquarters building. Owner Trustee, a large national bank,
has agreed to provide the financing for such acquisition, and
consequently, Lessee and Owner Trustee entered into a number of
agreements, all dated as of October 21, 1999. The agreements
include: 1) Trust Agreement, 2) Participation Agreement, 3)
Credit Agreement, 4) Security Agreement, 5) Agency Agreement,
and 6) Lease Agreement.

Under the agreements, Owner Trustee is trustee of the Trust
whose sole purpose is to acquire and hold title to the real
property of the Lessee for the benefit of a planned consortium
of banks and financial institutions, some acting as holders, who
have provided funds to the Trust and hold beneficial interests
in the Trust, and some acting as lenders, who have loaned funds
to the Trust. Owner Trustee is not a business trust and is
prohibited by the terms of the Trust from transacting business
of any kind with respect to the trust assets.

Owner Trustee and Lessee entered into the Lease Agreement, under
which Owner Trustee leases to Lessee the property desired by
Lessee. The term of the Lease Agreement is coterminous with the
term of Owner Trustee's borrowings from lenders. The Lease
Agreement and the loan documents contain cross default

provisions.

The relevant provisions of the Lease Agreement are summarized as
follows:

1. The Lease is for a basic term of six years, and Lessee, with
   the consent of Owner Trustee and every lender and holder, may
   renew the Lease for three additional five-year terms if no
   default has occurred.

2. Lessee is obligated to pay "Basic Rent" to Owner Trustee.
   Basic Rent is equal to the sum of the interest due on the funds
   borrowed by Owner Trustee for acquisition of the property and
   the yield promised to the holders of interests in the Trust. In
   addition, Lessee is obligated to pay "Supplemental Rent", which
   is defined to mean all amounts, liabilities, and obligations
   other than Basic Rent that Lessee has agreed to assume or pay
   under any of the Agreements entered into by Lessee, including
   any amounts due upon termination of the Lease Agreement.

3. Upon termination of the Lease, whether because of early
   termination, default, the purchase option described below, or
   the sale option described below, Lessee must pay Owner Trustee
   the "Termination Value". The Termination Value is basically the
   principal amount of all funds invested or loaned to the Trust by
   the holders and lenders, all accrued but unpaid interest, all
   accrued but unpaid yield to holders, and all rent and other
   amounts then due and payable, including all expenses of sale if
   the property is sold pursuant to the sale provision.

4. Lessee is obligated to pay all costs for the use, occupancy,
   or operation of the property, including all utility charges and
   operating expenses of any kind.

5. Lessee's obligations under the Lease Agreement are absolute
   and unconditional, and the Lease constitutes a net lease.

6. The Lease Agreement evidences the intentions of the parties
   that, other than for accounting purposes, it be treated as a
   financing arrangement. For federal, state, and local tax
   purposes, regulatory, bankruptcy, commercial law, real estate,

and all other purposes, the Lease Agreement states that the
intentions of the parties are that Lessee be treated as owner of
the property and entitled to all tax benefits ordinarily
available to owners of similar properties.

7. Lessee acquires the property in "as-is, where-is" condition.

8. Lessee maintains, at its own expense, insurance coverage
   with respect to the property.

9. Lessee must maintain the property in good condition, repair,
   and working order.

10. If Lessee defaults under the Lease, Owner Trustee, among
    other remedies, is entitled to recover final liquidated damages
    equal to the Termination Value. Owner Trustee is then required,
    at Lessee's expense, to assign its interest in the property to
    Lessee.

11. At the end of the lease term, Lessee has an election to
    either (a) have the property sold to a third party, or (b)
    purchase the property for its Termination Value. If Lessee
    elects to have the property sold to a third party, Lessee must
    pay Owner Trustee the Termination Value out of the proceeds of
    sale.

12. All risk of loss with respect to the property is assumed by
    Lessee.

Law and Analysis

Section 212.031(1)(a), F.S., provides that:

every person is exercising a taxable privilege who engages
in the business of renting, leasing, letting, or granting a
license for the use of any real property....

The question that must be answered in this case is whether, when
the transaction is analyzed as a whole in light of the parties'
intentions, the Owner Trustee is engaged in leasing real
property to the Lessee, or whether the transaction is in

substance a mortgage arrangement under which the Owner Trustee's
property interest is held merely as security for repayment.

Under certain circumstances, for tax purposes, a document
structured as a lease may be treated as a mortgage.
Bridgestone/Firestone, Inc. v. Department of Revenue, DOAH Case
Number 92-2483, 15 FALR 4874 (1993). The Administrative Hearing
Officer in Bridgestone/Firestone stated, "Although a document
may be called a lease on its face, this in itself is not
dispositive of the issue. Rather, in order to properly determine
the true nature of the transaction, it is necessary to examine
the intention of the parties and the substance of the
agreement." (Paragraph 23). Additionally, the hearing officer
stated: "Initially, it is noted that a taxpayer can treat an
item one way for financial recording purposes and another way
for tax purposes...." (Paragraph 24)

In Bridgestone/Firestone, a sale-leaseback transaction was
examined. In that case, it was determined that the transaction
taken as a whole was a mortgage loan transaction (affirmed by
the Department of Revenue in its final order), rather than a
lease. Great emphasis in the case was placed upon the fact that
the transaction was structured specifically to have the
transaction treated as a lease for accounting purposes, yet
still have the overall economic substance of the transaction
treated as financing for federal tax purposes. In particular,
the taxpayer did not treat the sale-leaseback as a sale,
continued to depreciate the property, and reported payments as
principal and interest. Additionally, the rental payments were
based upon the value of the consideration (interest) for the
financing, not upon the fair market value of the property. The
obligations of the tenant continued even in the case of
condemnation, and the risk of loss stayed with the tenant.

Those factors are also present in the instant case. The sole
purpose of entering into this very complex transaction,
requiring six agreements and hundreds of pages of documentation,
was to secure financing for the Lessee that would be treated as
a lease for accounting purposes but for all other purposes would
be treated as a borrowing of money secured by a mortgage. The
Lease Agreement clearly states in Article 7.1(a) that the

parties intend that "for federal and all state and local income
tax purposes, bankruptcy purposes, regulatory purposes,
commercial law and real estate purposes and all other
purposes... this Lease will be treated as a financing
arrangement." These types of arrangements are often used by
corporations to secure "off balance sheet financing."

The Lease Agreement further states that for all of the above
purposes other than accounting purposes, the parties "intend
this Lease to constitute a finance lease and not a true lease."
The Lease Agreement goes on to grant in specific terms a lien
and mortgage to the Owner Trustee on all right, title, and
interest of the Lessee in the real property. The Agreement
provides in Article 7.1(b) that the acquisition of title by the
Owner Trustee constitutes a grant by Lessee of a "security
interest, lien, deed of trust and mortgage in all of Lessee's
right, title, and interest in and to the Property...."

As indicated, the Administrative Hearing Officer in
Bridgestone/Firestone also focused on other factors in reaching
his decision, such as whether the lessor is a single purpose
financing entity, whether the rent charged is a fair market rent
or some mix of interest and principal, and which party bears the
risk of loss and certain expenses.

It was found in Bridgestone/Firestone that the lessor was a
single purpose financing entity. In the present case, the Trust
is also a single purpose financing entity. Additionally, the
national bank acting as Owner Trustee is prohibited from
engaging in any business in its capacity as trustee other than
what is necessary to fulfill the purposes of the transaction as
described above.

As in Bridgestone/Firestone, the payments being made under the
Lease Agreement, although described as rent for accounting
purposes, bear no relationship to what might be the fair rental
value of the real property. Instead, "Basic Rent" is precisely
equal to the sum of the interest due on the funds borrowed by
the Owner Trustee for acquisition of the property and the yield
promised to the holders of the beneficial interests in the
Trust.

The Administrative Hearing Officer in Bridgestone/Firestone also
focused on the fact that the lessee bore the risk and expense of
certain obligations. Here, the Lessee pays all costs for using
and operating the property, and upon termination of the Lease,
has the absolute obligation to pay to the Owner Trustee the
Termination Value, which is defined by the agreements
essentially as the balance due on the mortgage loan. Such
obligation survives condemnation. Additionally, all risks of
loss of the property, including damage or destruction by fire,
the elements, casualties, thefts, riots, wars, or otherwise, are
assumed by the Lessee.

Accordingly, under the terms and conditions of all of the
documents presented, as in Bridgestone/Firestone, it is our
conclusion that the Lease between Owner Trustee and the Lessee
more closely resembles a mortgage loan than it does an
arrangement for the use of property.

Section 697.01(1), F.S., provides:

All conveyances, obligations conditioned or defeasible,
bills of sale or other instruments of writing conveying or
selling property, either real or personal, for the purpose
or with the intention of securing the payment of money,
whether such instrument be from the debtor to the creditor
or from the debtor to some third person in trust for the
creditor, shall be deemed and held mortgages, and shall be
subject to the same rules of foreclosure and to the same
regulations, restraints and forms as are prescribed in
relation to mortgages. (Emphasis added)

Section 697.01(1), F.S., thus provides that even though the
documentation of a transaction may not be denominated as a
"mortgage," it will be treated as such if entered into for the
purpose of securing the payment of money. Here, the transaction
is denominated as a lease for financial accounting purposes, but
it is also denominated, for all other purposes, as a financing
arrangement, and the Lessee specifically grants a lien, security
interest, mortgage and deed of trust to the Owner Trustee.
Payments made by Lessee under the Lease Agreement are therefore

not considered lease payments and are not subject to sales tax
under section 212.031, F.S.

This letter discusses only the application of sales and use tax
to the payments made under the Lease Agreement and does not
discuss any other tax aspects of the overall transaction, such
as the possible application of the Florida intangible tax or
documentary stamp tax.

This response constitutes a Technical Assistance Advisement
under section 213.22, F.S., which is binding on the Department
only under the facts and circumstances described in the request
for this advise, as specified in section 213.22, F.S. Our
response is predicated upon those facts and the specific
situation summarized above. You are advised that subsequent
statutory or administrative rule changes or judicial
interpretations of the statutes or rules upon which this advice
is based may subject similar future transactions to a different
treatment from that which is expressed in this response.

You are further advised that this response, your request and
related backup documents are public records under Chapter 119,
F.S., which are subject to disclosure to the public under the
conditions of section 213.22, F.S. Confidential information
must be deleted before public disclosure. In an effort to
protect confidentiality, we request you provide the undersigned
with an edited copy of your request for Technical Assistance
Advisement, the backup material and this response, deleting
names, addresses and any other details which might lead to
identification of the taxpayer. Your response should be
received by the Department within 15 days of the date of this
letter.

Sincerely,

Robert D. Heyde
Senior Attorney
Technical Assistance & Dispute Resolution
Control #39655