Did a 1993 Florida ruling treat related-party office rent used for jointly guaranteed mortgage debt as nontaxable?

Subject

Related Party Lease

Plain-English summary

The original ruling treated the portion of related-party office rent needed to amortize jointly guaranteed mortgage debt as a debt payment rather than taxable rent—but the official source now marks this ruling obsolete and superseded. Any payment above the amount legally necessary to amortize the debt remained taxable even under the ruling's own analysis.

The Department found common ownership, equal liability through the tenant corporation's contemporaneous unconditional guaranty, and lease payments at least equal to debt service. It also warned in the ruling itself that the rule lacked a statutory basis and was being revised so the conclusion would cease to apply.

What this means for you

This page preserves an obsolete historical position. The source directs readers to the later declaratory statement, Regal Kitchens litigation, and TIP 95A-02, so the 1993 exemption analysis should not be used for current transactions.

Common questions

Q: What did the original three-part test require? Related landlord and tenant entities, equal liability on the secured debt, and payments at least equal to the amount needed to amortize that debt.

Q: Were payments above debt service exempt? No. The excess was taxable rent.

Q: Can this ruling be relied on now? No. The official status line labels it obsolete and superseded.

Citations and references

• Fla. Admin. Code r. 12A-1.070(19)(c) — former related-entity debt-payment rule
• Fla. Stat. § 212.031(1) — tax on real-property rent
• Regal Kitchens, Inc. v. Department of Revenue, 641 So. 2d 158 (Fla. 1st DCA 1994)
• Fla. Stat. § 213.22 — Technical Assistance Advisements

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 93A-009

Original ruling text

Status: Obsolete - Superseded by - Declaratory Statement, DOR
92-3 (March 2, 1993), Ref. Regal Kitchens vs. DOR;
Ref. 15 FALR, 1467; Refer to court case Regal
Kitchens, Inc. v. DOR; 19FLW D1654, 641 So.2d 158,
1994 Fla. 1st DCA 5224; also see TIP 95A-02

Feb 17, 1993

Re: Technical Assistance Advisement (TAA) 93A-009
Sales Tax - Related Party Lease of an Office Building
Rule 12A-1.070(19)(c), F.A.C.
XXX "Partners/Shareholders or Landlord")
XXX (Herein "Partnership")
XXX (Herein "Tenant or Corporation")
XXX (Herein "Bank or Lender")

Dear :

This reply is to your September 11, 1992, petition for the
Department's issuance of a Technical Assistance Advisement
("TAA") pursuant to s. 213.22, F.S., concerning the captioned
matter and parties. Your petition 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.
Therefore, the Department is herewith granting your request for
the issuance of a TAA and the ensuing discourse shall embody
said ruling.

DISCUSSION OF FACTS

We understand the facts of this case as stated in your petition
and supporting documents to be as follows:

FROM YOUR PETITION

"The Corporation rents its office space and adjoining land
from the related Partnership. The Corporation and
Partnership are related through common ownership, i.e., the
partners of the Partnership are the shareholders of the

Corporation. The Corporation pays the Partnership $XX rent
monthly plus $XX in sales tax.

"The Partnership originally borrowed $XX to purchase the
land, building and finish the interior construction. The
note payable to Liberty Bank was secured by the land and
building. This note and mortgage was due on February 10,
1992. Due to the ballooning of the XXX note, the partners
were required to obtain new financing with [Bank]. [Bank]
financed $XX (the remaining balance) and secured the note
with a mortgage on the land and building.

FROM LEASE

Examination of the Lease reveals that the Partners/Shareholders
are named as the lessor and the Corporation is named as the
lessee. However, the Lease fails to specify that the
Partners/Shareholders are executing the Lease on behalf of
Partnership. In fact, nowhere in the Lease is Partnership even
alluded to in any fashion. Moreover, none of the supporting
documents expressly or by implication indicate that the premises
occupied by Corporation is partnership property of Partnership
pursuant to s. 620.595, F.S. Thus, it would appear the
Partners/Shareholders are the Landlord rather than the
Partnership.

FROM PROMISSORY NOTE

The Promissory Note ("Note") names the Partners/Shareholders (as
individuals) jointly and severally as the makers. As with the
lease, no reference is made to the Partnership. The terms of
the note do not in any manner refer to the Partnership as the
maker.

FROM MORTGAGE AND SECURITY AGREEMENT

The terms of the Mortgage and Security Agreement ("Mortgage")
name the Partners/Shareholders as the mortgagors, not the
Partnership. As with the Lease and Note, the Mortgage does not
allude to the Partnership in any form or fashion.

FROM GUARANTY

The Corporation executed, as guarantor, on even date with the
Note and Mortgage a guaranty agreement entitled "Continuing and
Unconditional Guaranty" ("Guaranty"). The Guaranty, as styled,
is a "continuing and unconditional guarantee of the payment in
full when due of any and all indebtedness of Borrower to Bank,
to the same extent as if Guarantor were the principal debtor of
the indebtedness." Like the Note and Mortgage, the Guaranty
identifies the Partners/Shareholders as the Borrowers, not the
Partnership.

REQUESTED ADVISEMENT

You endeavor to evoke the advice of the Department on the
following matter:

"Please advise whether or not Rule [12A-1.070(19)(c),
F.A.C.,] is effective for transactions between a related
partnership and corporation as well as related
corporations."

DISCUSSION AND ANALYSIS OF LAW

As you are aware, the subject exemption is set forth in Rule
12A-1.070(19)(c), F.A.C. However, you should note that this
rule paragraph is currently in the process of being repealed,
and when the repeal becomes effective, the subject exemption
will be rescinded prospectively from the effective date of said
repeal.

The text of Rule 12A-1.070(19)(c), F.A.C., states:

"The total consideration furnished by one corporation to a
related corporation for the occupation of real property or
the use or entitlement to the use of real property owned by
the related corporation is subject to tax, even though the
amount of the consideration is equal to the amount of the
consideration legally necessary to amortize a debt [owed]
by the related corporation and secured by the real property
occupied, or used, and even though the consideration is

ultimately used to pay that debt. However, such
consideration is not rent but the payment of a debt if the
corporation furnishing the consideration is as equally
liable on the debt secured by the real property as the
related corporation; any amount furnished to the related
corporation over the amount legally necessary to amortize
that debt is subject to tax unless specifically exempted by
statute." (Emphasis Supplied)

In construing the exception or exemption described in the
foregoing rule, the Department must adhere to and be guided by
the long-standing and fundamental precept of statutory
construction, established by the Florida Supreme Court, which
mandates that exemptions from or exceptions to taxing statutes
must be strictly construed against the taxpayer. See Asphalt
Pavers v. Dept. of Revenue, 584 So.2d 57 (Fla. 1st DCA 1991);
Dade Cty. Taxing Auth. v. Cedars of Lebanon, 355 So.2d 1205
(Fla. 1978), reh. den. April 5, 1978; Williams v. Jones, 326
So.2d 425 (Fla. 1975), reh. den. March 4, 1976; Straughn v.
Camp, 293 So.2d 689 (Fla. 1974); United States Gypsum Company v.
Green, 110 So.2d 409 (Fla. 1959).

Strict analysis of the above paragraph of the rule manifests the
presence of a three pronged test all prongs of which must be
satisfied in order for a landlord to be considered as exercising
an exempt privilege when engaging in the rental, lease, letting,
or license to use real property. Namely, the prongs of the test
are: (i) the landlord (corporation) must be related to the
tenant (corporation); (ii) the tenant must be equally liable on
the debt secured by the real property as is the landlord; and
(iii) the amount of the consideration paid by the tenant to
landlord must at least be equal to the amount of consideration
legally necessary to amortize the debt owed by the related
landlord and secured by the property occupied by the tenant.
Under the terms of this rule, the Department has adopted the
position that leases of real property by and between entities
which are organized as other than corporations may qualify for
the subject exemption provided that all other aspects of the
above enumerated tests are fully complied with. It therefore
follows that a closely held corporation, as tenant, and its sole
shareholders, as landlord, or a general partnership, as

landlord, where the shareholders of the tenant corporation and
partners of the landlord partnership are exactly the same
persons, will be considered by the Department to be embraced
within the framework of this rule if their relationship displays
in all other attributes those characteristics requisite to
exemption which are set out in the rule and are summarized
above.

Upon scrutiny of the representation of facts and supporting
documents, it appears that all prongs of above described tests
would be satisfied under the instant circumstances. Considering
the first prong of the test, the Landlord owns 100% of the
equity shares of the Corporation, as tenant; hence, Landlord and
tenant Corporation are indisputably related for the purpose of
ascertaining eligibility for the subject exemption. Considering
now the second prong of the test, we acknowledged the Lender as
a condition precedent to refinancing Landlord's debt required
the execution by Corporation of an unconditional and absolute
guaranty ("Guaranty") of punctual payment of the loan by
Landlord as a condition precedent of making the loan as
evidenced by the copy of the Guaranty submitted with your
request. Moreover, the Guaranty was executed on even date with
the Note it guarantees. In the case of the Guaranty,
contemporaneous execution of a note and guaranty is required as
under such circumstances a guaranty agreement is duly supported
by consideration and, thus, is recognized as an enforceable
contract. A guaranty which is executed simultaneously with the
debt it guarantees "... and becomes an essential ground of the
credit given to the principal debtor, the same consideration for
the principal debt suffices for the contract of guaranty."
Gordon v. Corporate Insurance Services, Inc., 374 So.2d 603, 604
(Fla. 3d DCA 1979). See also, Mullens v. Sunshine State Service
Corp., 540 So.2d 222 (Fla. 5th DCA 1989); Suburban Nursing &
Mobile Homes, Inc. v. Shaw, 498 So.2d 485 (Fla. 3d DCA 1986);
Herrada v. S & J Realty, Inc., 475 So.2d 1276 (Fla. 3d DCA
1985); and Anderson v. Trade Winds Enterprises Corp., 241 So.2d
174, 178 (Fla. 4th DCA 1970). Thus, in light of the Guaranty,
we must conclude that Landlord and Tenant, have satisfied the
equal liability requirement described as the second prong of the
test embodied in Rule 12A-1.070(19)(c), F.A.C. Lastly,
considering the third and final prong of the test, the terms of

the Lease and the Note evidence that the Lease payments by
Tenant to the Landlord are in amounts at least equivalent to
that legally necessary to amortize the debt secured by the
property which Tenant occupies. Hence, the third prong of the
test is satisfied. However, you are hereby alerted to the fact
that any residual amount paid by Tenant to Landlord in excess of
that legally necessary to amortize the debt is subject to sales
tax as the payment of rent.

DEPARTMENT'S FINDINGS

For the reasons enunciated in the foregoing discussion and
analysis of law, we hereby affirm that the facts of this matter,
as represented to the Department through your petition and
supporting documentation, support a finding by the Department
that all facets of the exception described in Rule
12A-1.070(19)(c), F.A.C., have been satisfied. Therefore, the
Department herewith enters its finding that the payments by
Tenant to Landlord pursuant to the Lease by and between said
parties in amounts legally necessary to amortize the debt (made
by Landlord, guaranteed by Tenant, and secured by the property
which Tenant occupies) constitute under the rule the payment of
debt rather than the payment of taxable rent.

CAVEAT

The Department of Revenue has determined that there is no
statutory basis for the provision in Rule 12A-1.070(19)(c),
F.A.C., that when consideration for the right to occupy real
property flows to or from related entities, the portion of it
that is used for discharging a debt on which the entities are
equally liable is not taxable as rent under s. 212.031(1), F.S.
Therefore, that rule is being revised to delete this provision.
The proposed revision will soon be published in the Florida
Administrative Weekly, promulgated under normal rule making
procedures and will become effective as soon thereafter as
allowed by law.

This is to alert you to the fact that the conclusions reached in
this response may no longer be valid once a proposed amendment
to Rule 12A-1.070(19), F.A.C., becomes effective. After that

date, such payments, including those made under leases entered
into before the rule revision, will be taxable as rent.

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 and your request are
public records under Chapter 119, F.S., which are subject to
disclosure to the public under the conditions of s. 213.22, F.S.
Your name, address, and any other details which might lead to
identification of the taxpayer must be deleted by the Department
before disclosure. In an effort to protect confidential
information, we request you notify the undersigned in writing
within 15 days of any deletions you wish made to the request or
this response.

Sincerely,

Daniel M. Wagner, Jr.
Tax Law Specialist

DW/dw