Were a tenant's monthly repayments of a landlord-funded improvement allowance taxable as part of commercial rent?

Plain-English summary

The tenant-improvement repayments were taxable as part of the total commercial rent. The lessor provided an allowance of up to $1 million for fencing, pavement restoration, lighting, and other work. The tenant used the full amount and repaid it with interest through monthly payments over ten years.

The lease called those payments additional consideration and treated sums due beyond base rent as additional rent. Making and paying for the improvements was tied to continued occupancy, the improvements became the lessor's property at termination, and their value helped explain lower base rent during the early lease years.

The Department therefore rejected the tenant's characterization of the arrangement as a construction loan. The lessor kept the payments and received the lasting property benefit, so the repayments were consideration for use and occupancy.

What this means for you

Label and economics aligned here: the lease called the payments rent, occupancy depended on them, the landlord ultimately owned the work, and pricing reflected the improvement value. A separate, genuine construction loan could present different facts.

Common questions

Q: Were the monthly reimbursements taxable? Yes.

Q: Why were they rent rather than loan repayments? They were paid to the lessor under the lease, supported occupancy, affected rent pricing, and bought improvements the lessor ultimately kept.

Q: Did it matter that the tenant chose to use the full allowance? The holding applied after the tenant elected to use it and became obligated to repay the amount used.

Citations and references

• Fla. Stat. §§ 212.031(1)(a), (c) and 212.02(10)(i) — commercial rent and license to occupy
• Fla. Admin. Code r. 12A-1.070(1)(a)7., (4)(b) — rent and tenant consideration
• Fla. Stat. § 213.22 — Technical Assistance Advisements

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 02A-020

Original ruling text

SUMMARY

QUESTION: Are payments made to a lessor by a lessee for
“tenant improvements" subject to sales tax when: 1) the
governing lease agreement indicates that the
"reimbursements" are to be considered rent payments, 2) the
tenant is required to make such "reimbursements" in order

to continue to occupy the premises, 3) the existence of the
reimbursements was a factor in pricing the lease, and 4)

the "tenant improvements” will ultimately transfer to the

lessor.

ANSWER - Based on the Facts Below: Yes. The "tenant

improvement" payments made by lessee are part of the "total
rent or license fee" paid to lessor for the privilege of
remaining in possession of the subject property.

Accordingly, such payments are taxable under s. 212.031,
F.S.

Apr 15, 2002

Re: Technical Assistance Advisement 02A-020
Sales and Use Tax -- Tenant Improvements/Part of Total Rent
Statutes: Sections 212.031(1)(a)8., 212.02(10)(i), F.S.
Rules: Rule 12A-1.070(1)(a) 7., F.A.C.
XXX ("Lessor")
FEI #: XX
XXX ("Lessee")
FEI #: XX

Dear :
This is in response to your request for a Technical Assistance
Advisement (TAA) regarding the taxability of real property

improvement charges classified as additional rent.

Facts

Lessor leases approximately 16.6 acres of its property to
Lessee. Lessee uses the premises for offices, warehouse and
distribution facilities, and other maritime-related purposes.
According to Addendum IV of the lease agreement (Special

Conditions, 1. Improvements to the Premises Financed by the

Authority), Lessee was provided with an Improvement Allowance of
up to $1,000,000 to be used to finance improvements such as
fencing, pavement restoration, lighting and other miscellaneous
repairs or improvements necessary to make the premises suitable

for Lessee's authorized use.

Lessee was under no specific contractual obligation to use the
$1,000,000. Lessee was obligated to repay any portion of the
allowance it elected to use back to Lessor, plus interest, by
commencing monthly payments amortized over 10 years upon
completion of the subject improvements. Lessee elected to use

the full amount of the improvement allowance. Under Addendum IV
of the lease agreement the reimbursements are styled Additional
Consideration, and must be paid directly to lessor as part of

the monthly rental consideration.

Requested Advisement

Whether payments included as a part of monthly rental payments,
styled "additional consideration” in the governing agreement,

are taxable rental payments when such payments are made as
reimbursements under a provision for a tenant improvement

allowance.

Applicable Law and Discussion

Section 212.031(1)(a), F.S., provides that it is the legislative
intent 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, with

certain enumerated exceptions. A "license" to use real property
is defined in section 212.02(10)(i), F.S., as "... the granting

of a privilege to use or occupy a building or a parcel of real

property for any purpose."

Section 212.031(1)(c), F.S., provides in part:

For the exercise of such privilege, a tax is levied in an
amount equal to 6 percent of and on the total rent or
license fee charged for such real property by the person
charging or collecting the rental or license fee. The
total rent or license fee charged for such real property
shall include payments for the granting of a privilege to
use or occupy real property for any purpose and shall

include base rent, percentage rents, or similar charges....

Determination

The consideration paid by Lessee for the right to use and occupy
the premises is apportioned in the Lease as "Rent" and
"Additional Rent." Addendum IV provides that the tenant
improvement reimbursements should be styled "Additional
Consideration." Section II B. of the Lease provides, in

pertinent part:

Whenever under the terms of this lease any sum of money is
required to be paid by Tenant in addition to the Rent set
forth herein... such sum shall be deemed "Additional Rent"
if not paid when due, and shall be collectible as such with
the first installment of Rent falling due thereafter. Said

sum shall be deemed Additional Rent regardless of whether
it is herein described as Additional Rent or a provision is

made for the collection of such sum as Additional Rent.

Under the Lease and Addendum IV, the reimbursements are
“Additional Rent," paid directly to lessor as part of the

monthly rental consideration. Thus, the lease agreement itself
contemplates that the money paid for the specified improvements

is rent paid for the use of the property.

The Department does not agree with Lessee's characterization of
the tenant improvement allowance as a loan. Lessor did not
provide a short-term loan to cover construction costs and did

not pass on Lessee's payments to another entity. Lessor was the
terminus for the payments made by Lessee. The lease agreement
itself specifically provides that certain necessary

improvements, such as fencing, pavement repairs, and lighting,

are to be agreed upon by both parties during a 60-day "due
diligence" period. The obligation to pay rent does not commence
until substantial completion of the improvements agreed to
during the due diligence period, provided such improvements are
substantially completed on or before May 15, 2000. Otherwise,
rental payments commence May 15, 2000. If the tenant fails to
make improvements, or fails to pay for such improvements, then
the Lessor can re-enter the property and take possession of the
leased premises. The making of the improvements, the cost of
which is to be borne fully by the tenant, is a condition

precedent to occupancy. The making of the improvements is not

optional for the tenant.

At the termination of the lease, all improvements become the
property of the Lessor. These improvements are of a nature that
would benefit any tenant of the Lessor's property, not just the
Lessee. The Lessee has no claim to the improvements at the
termination of the lease. Thus, the Lessor clearly receives an
economic benefit from the improvement. The fact that the
improvements benefit the property in general is reflected in the
schedule of lease payments. During early years of the lease,
when the improvements are required to be made, the lease
payments are significantly lower (20% - 25%) than those in later
years. The fact that significant leasehold improvements were to
be made at the tenant's expense was taken into consideration in

pricing the base rent for the first few years of the lease.

Section 212.031(1)(c), F.S., imposes sales tax on the total rent
or license fee charged for the use or occupancy of real
property. Rule 12A-1.070(4)(b), F.A.C., describes the tax as
levied on all "considerations" paid by the tenant. While the
rule does not define "consideration," Black's Law Dictionary

(Sixth Ed. 1990), defines such term as follows:

[IInducement to a contract... Some right, interest,

profit, or benefit accruing to one party....

In this situation, the lease agreement itself specifically
indicated that the reimbursements for the improvements were to
be considered rent payments. The Lessor is required to make

such reimbursements in order to retain occupancy of the

premises. The Lessor receives an economic benefit from the
reimbursements, as they represent amounts paid by the Lessee for
improvements that ultimately transfer to the Lessor for the

Lessor's use with respect to future tenants. And, the existence

of such reimbursements was a factor in pricing the lease. Due

to the economic value of the improvements that would ultimately
be received by the Lessor, the Lessor substantially reduced the
base rental payment for the first few years of the lease, when

the improvements needed to be made. Accordingly, the Department
must construe the tenant improvement reimbursements as part of
the total rent paid by Lessee for the use and occupancy of the
premises rather than as payments made pursuant to a loan for

construction services.

This response constitutes a Technical Assistance Advisement
under s. 213.22, F.S., which is binding on the Department only
under the facts and circumstances described in the request for
this advice as specified in s. 213.22, F.S. Our response is
predicated on 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 than

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., and are subject to disclosure to the public under the
conditions of s. 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,

Case A. Bodiford
Attorney

Control # 46875