Did amendments to a real-property financing arrangement turn the parties' stated lease into a taxable lease?

Plain-English summary

Florida reaffirmed that the amended arrangement was mortgage financing, not a taxable lease of real property. Although one document was called a lease, the Department considered all related agreements and the parties' economic relationship.

The owner-trustee had borrowed approximately $30 million to develop property and leased it back to the lessee. The amendment increased the borrowing to $65.2 million, added a completed office building and data center, supported loan syndication, and let the lessee purchase all or fewer than all covered properties before the lease ended.

Those changes did not alter the earlier conclusion in TAA 99A-035. The Department said the structure continued to resemble a mortgage loan: the owner-trustee held bare legal title as security, the lessee bore the economic risks, and the rent reflected financing costs rather than fair-market rent. Payments under the amended agreement therefore were not taxable under section 212.031.

What this means for you

A document's “lease” label did not control. Florida looked at the complete transaction, the parties' intent, risk allocation, rent economics, title function, and purchase rights.

Common questions

Q: Did adding another property change the result? No. The Department said it further supported viewing the agreement as umbrella financing for multiple properties.

Q: Did the larger syndicated loan make the payments taxable rent? No.

Q: Was the conclusion based on the lease alone? No. The Department considered the lease with all other agreements in the same transaction.

Citations and references

• Fla. Stat. § 212.031(1)(a) — tax on renting, leasing, or licensing real property
• Fla. Stat. § 697.01(1) — listed in the advisement
• Bridgestone/Firestone, Inc. v. Department of Revenue, DOAH Case No. 92-2483, 15 FALR 4874 (1993) — substance of lease-versus-financing analysis
• Fla. Stat. § 213.22 — Technical Assistance Advisements

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 00A-013

Original ruling text

SUMMARY

QUESTION: Do the amendments to a set of agreements, entered
into in connection with the acquisition or improvement of
real property, change the nature of the agreements as a
mortgage financing arrangement?

ANSWER - Based on Facts Below: No. The set of agreements,
even though one agreement is designated a "lease," continue
to 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.

Mar 09, 2000

Re: Technical Assistance Advisement 00A-013
Sales & Use Tax - Financing Lease Agreement
Sections 212.031(1)(a); 697.01(1), F.S.
XXX ("Lessee")
F.E.I. # XX
XXX, National Association, not individually, but Solely as
Owner-Trustee under the XXX. ("Owner Trustee")
XXX ("Bank")

Dear :

This is in response to your letter dated XX, for the
Department's 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.

Last year, the Department issued to you TAA# 99A-035, which
involved the same transaction as that involved in the present
request. Because of changes in certain aspects of the
transaction, reflected in Amendment No. 1 to the operative
documents, you have requested that the Department reaffirm its
determination in TAA# 99-035.

Advisement Requested

You have requested our reaffirmation that the Lease Agreement,
as amended, when considered with the 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 basic facts are as set forth in TAA# 99-035. We there
described the transaction as follows:

In summary, Lessee has leased to Owner Trustee certain real
property under a 99-year ground lease. Owner Trustee has
borrowed approximately $30,000,000 from Bank with which to
develop the property. Lessee is acting as the agent of
Owner Trustee to administer Owner Trustee's obligations
under the Loan, to administer the construction contracts
for development of the property, and to supervise other
construction activities. Owner Trustee is then leasing the
property back to Lessee under the Lease Agreement, and
Lessee will occupy the property upon completion of the
construction.

Although only one property was involved in TAA# 99-035, the
agreements contemplated that additional properties could be
acquired and that the agreements, including the Lease Agreement,
would apply to any additional properties. The Lessee has now
decided to acquire a completed office building and data center,

and in order to finance the acquisition, the parties have agreed
to increase the amount of the borrowing from $30,000,000 to
$65,200,000.

Amendment No. 1 is dated as of October 1, 1999, and amends, to
some extent, substantially all of the agreements described in
TAA# 99-035. The amount of the borrowing has been increased to
$65,200,000. That increase in the amount of the borrowing by the
Owner Trustee has led the Bank to syndicate the loan, and much
of Amendment No. 1 deals with the amendment of terms necessary
to give effect to that syndication. Amendment No. 1 also
modifies the Lease Agreement to allow the Lessee to exercise an
option, prior to the end of the lease term, to purchase all, or
fewer than all, of the properties covered by the Lease
Agreement. (Prior to Amendment No. 1, Lessee had the option to
purchase all of the properties at the termination of the Lease).

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....

As stated in TAA# 99-035, the question that must be answered is
whether, when the transaction is analyzed 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 bare legal title to
the property is held by the Owner Trustee as security for
repayment.

We relied in large part in TAA# 99-035 on the case of
Bridgestone/Firestone, Inc. v. Department of Revenue, DOAH Case
Number 92-2483, 15 FALR 4874 (1993), and pursuant to the
principles of that case, concluded that, under the terms and
conditions of all of the documents presented, the Lease between
the Owner Trustee and the Lessee more closely resembled a
mortgage loan than it did an arrangement for the use of
property.

There is nothing in Amendment No. 1, or in the agreements as
modified by Amendment No. 1, that would change our conclusion.
The increase in the amount covered by the agreements and the
addition of another parcel of property, if anything, lends
further support to our conclusion that the arrangement is less a
lease of real property and more a financing arrangement. The
Lease Agreement, unlike a typical operating lease, functions as
an umbrella agreement covering the ownership and use of multiple
properties.

We accordingly affirm our conclusions in TAA# 99-035 and find
that the Lease Agreement, as amended by Amendment No. 1, 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.

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 #40295