How could a hotel allocate taxable and exempt rent under a mixed-use ground lease?

Plain-English summary

A hotel operator leased land from a county and asked how to divide its ground rent between taxable business use and exempt dwelling-unit use. It proposed a square-footage fraction producing a 23.25% taxable ratio.

Florida found the calculation reasonable on the presented facts. The numerator included ground-level land and improvements used exclusively in hotel operations, offices, restaurants, lounges, other non-guest areas, and amenities for which guests paid a separate charge.

The denominator included the entire leased area, land and improvements. For the ground lease, only the physical ground-level footprint was counted, while guest rooms and common areas principally provided to guests supported the exempt allocation.

What this means for you

Mixed-use rent requires a reasonable, fact-specific allocation. Square footage can work when the calculation consistently distinguishes dwelling and guest-common uses from commercial and lessee-exclusive uses.

Common questions

What taxable ratio did Florida accept? The proposed 23.25% ratio appeared reasonable for these facts.

Were restaurants and lounges treated as dwelling use? No. They were commercial areas included in the taxable numerator.

Were separately charged guest amenities taxable areas? Yes. The numerator included spaces for which a guest paid a separate use fee.

Citations and references

• Fla. Stat. § 212.031(1)(b)-(c) (mixed-use leases and reasonable allocation)
• Fla. Admin. Code r. 12A-1.070(14)(a) (allocation of mixed-use real-property rent)
• Fla. Stat. § 213.22 (Technical Assistance Advisements)

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 06A-007

Original ruling text

SUMMARY:
QUESTION: Taxpayer has a ground lease for a hotel. They have determined a reasonable allocation and are seeking
guidance from the Department.
ANSWER - Based on Facts Below:
Section 212.031(1)(b), F.S., and Rule 12A-1.070(14)(a), F.A.C., provide that the Department shall identify those
portions of "rent" that are taxable and those that are tax-exempt. There are numerous allocation methods that can be
used. The following is the allocation that was used for this taxpayer.
The numerator is the square footage of the land and improvements used by the Lessee in the operation of the
business, such as the office area and all spaces that are used exclusively by the Lessee or that do not constitute
guest rooms or common areas principally provided to guests. Further, areas and spaces used for commercial
purposes (e.g., restaurants and lounges) are not considered to be used "exclusively as dwelling units" and would
therefore be included in the numerator. The numerator should also include square footage for which a guest is
charged a separate fee to use (e.g., steam room, tennis courts, etc.). The denominator is the total square footage of
the entire area subject to the Lease, including the land and the improvements thereon.

April 24, 2006

Re: Technical Assistance Advisement 06A-007
XXX ("the Taxpayer")
Taxable Portions of a Hotel Lease
Sales and Use Tax
Section 212.031, Florida Statutes ("F.S,")
Rule 12A-1.070, Florida Administrative Code ("F.A.C.")
Taxpayer's FEIN: XX

Dear:
This response is in reply to your letter dated XX, requesting the Department's issuance of a Technical Assistance
Advisement ("TAA") pursuant to Section 213.22, F.S., and Chapter 12-11, F.A.C., regarding the identification of
taxable portions of a hotel lease. An examination of your letter has established that you have complied with the
statutory and regulatory requirements for issuance of a TAA. Therefore, the Department is hereby granting your
request for issuance of a TAA.
ISSUE

What portion of the rental payments from a lessee to a lessor is subject to Florida sales tax wherein the property is
subject to a ground lease and the lessee is operating a hotel on that property?
FACTS
Based on your letter and the other documents you have provided, the relevant facts can be summarized as follows:
The Taxpayer has entered into a Land Lease with a Florida county on land owned by the county.
The Taxpayer operates a nationally known hotel on the leased property. The hotel's ground floor consists of a few
guest rooms, utility rooms, office areas, a pool, and other areas one would typically expect to find at a hotel.
The Taxpayer had been paying Florida sales tax to its lessor (the county) without taking into consideration those
portions of the ground lease that might be tax-exempt (i.e., used exclusively as dwelling units). In a phone
conversation, you also stated that the pool and spa area are strictly for the use of the hotel guests.
The following documents were submitted with your request: a copy of the land lease; plans of the first floor of the
building and the site; a survey of the property before development, reflecting total land area; and a summary indicating
the areas on the property that you believe are taxable, non-dwelling areas.
REQUESTED ADVISEMENT
Your Letter provides, in part:
... [We] are requesting confirmation that the land lease will be [76.75%] tax exempt and [23.25%] taxable for purposes
of sales tax determination; ...

TAXPAYER'S POSITION
Along with your letter, you provided a summary of what you consider to be the "taxable portions of the leased
property." Pursuant to our telephone conversation, you also submitted square footage information for employee
parking. The summary is revised to include that information and provides the following relevant information:
Name of Area (Taxable) Room #’s
Laundry/Hskpg/Storage
Storage

134

118 A,B,C

Square Footage
XX

XX

Reg/Offices/Empl Brk/
PBX/Mech
Carts

120 A-E,122 A-E
124C

Food Prep/Dry Storage

XX

XX
125 A,C

Elect/Stor/PumpRm/Water 128 A-D

XX
XX

Htrs
Total Taxable Building Areas

XX

Add: Taxable Retention Areas

XX

Add: Taxable Paved Area

XX

Total Taxable Area

XX

Total Land Leased Area

XX

Land Lease Taxable %

[23.25%]

Land Lease Non-Taxable %

[76.75%]
APPLICABLE STATUTES AND RULES

Section 212.031, F.S., provides in part:
(1)(a) It is declared to be 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 unless such property is:

2. Used exclusively as dwelling units.

(b) When a lease involves multiple use of real property wherein a part of the real property is subject to the tax herein,
and a part of the property would be excluded from the tax under subparagraph (a)1., subparagraph (a)2.,
subparagraph (a)3., or subparagraph (a)5., the department shall determine, from the lease or license and such other
information as may be available, that portion of the total rental charge which is exempt from the tax imposed by this
section....
(c) 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. ... In the case of a
contractual arrangement that provides for both payments taxable as total rent or license fee and payments not subject
to tax, the tax shall be based on a reasonable allocation of such payments and shall not apply to that portion which is
for the nontaxable payments.

Rule 12A-1.070, F.A.C., provides in part:

(14)(a) When a rental, lease, or license to use or occupy real property involves multiple use of such real property

wherein a part of the real property is subject to tax, and a part of the property is excluded from the tax, the Executive
Director or the Executive Director's designee in the responsible program shall determine from the lease or license and
such other information as may be available, that portion of the total rental charge or license fee which is exempt from
the tax. When, in the judgment of the Executive Director or the Executive Director's designee in the responsible
program, the amount of rent or license fee stated in the lease or license arrangement for the taxable portion of the real
property does not represent true value, the Executive Director or the Executive Director's designee in the responsible
program shall make a determination of the proper amount of rent or license fee applicable thereto for the purpose of
determining the amount of tax due from such other information as is available.

DISCUSSION
The issue presented requires one to make a reasonable analysis in order to determine which areas of a hotel (and
specifically under a ground lease) would be subject to Florida sales tax under Section 212.031, F.S.
Section 212.031(1)(b), F.S., and Rule 12A-1.070(14)(a), F.A.C., provide that the Department shall identify those
portions of "rent" that are taxable and those that are tax-exempt. In reaching this determination, the Department must
develop a case-by-case approach that is reasonable. See Department of Revenue of the State of Florida v. Vanjaria E
nterprises, 675 So.2d 252 (Fla. 5th DCA, 1996). There are several approaches that may be used to reach a
reasonable determination. Which approach is most reasonable is a decision that must be made depending on the
facts and circumstances of the individual taxpayer.
In reaching the determination as provided in your request, you have used a method that involves a fraction to
determine which percentage of the rent paid is subject to Florida sale tax. This method recognizes that the Lessee will
owe Florida sales tax in the amount that results when the rate of 6 percent is multiplied by the fraction of the total
lease payment, which fraction is computed as follows: The numerator is the square footage of the land and
improvements used by the Lessee in the operation of the business, such as the office area and all spaces that are
used exclusively by the Lessee or that do not constitute guest rooms or common areas principally provided to guests.
Further, areas and spaces used for commercial purposes (e.g., restaurants and lounges) are not considered to be
used "exclusively as dwelling units" and would therefore be included in the numerator. The numerator should also
include square footage for which a guest is charged a separate fee to use (e.g., steam room, tennis courts, etc.). The
denominator is the total square footage of the entire area subject to the Lease, including the land and the
improvements thereon.
Furthermore, only the square footage that physically comprises the ground level of the lease is considered in the case
of a ground lease. Thus, the numerator would include the ground level of any leasehold improvements and any land
demised under the lease, whether undeveloped or developed, and used exclusively by the Lessee. This could include
areas of land demised by the lease, which can not be developed (for example, lands subject to environmental
restrictions [e.g., beach dunes] that cannot be used by the hotel guests, but that still represents a percentage of the
total square footage demised.)
CONCLUSION

The calculation provided of a taxable ratio of 23.25% would appear to be a reasonable determination based on the
facts presented to us.
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 advice as specified in Section
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,
Valerie L. Koenitzer, CPA
Senior Tax Specialist
Technical Assistance & Dispute Resolution
(850) 922-9412
vk/lp
Control No. 19319