Did an annual tenant-improvement credit reduce taxable commercial rent when the lease did not require the tenant to make improvements?

Plain-English summary

Florida ruled that the annual tenant-improvement credit reduced the commercial rent subject to sales tax.

The office lease required monthly base rent of $22,842, subject to increases, plus additional rent for specified taxes, expenses, charges, and reimbursements. It also gave the tenant an annual improvement credit against monthly base rent regardless of whether the tenant actually made or paid for improvements.

Because improvements were not mandatory under the lease, the Department treated the credit as a straightforward reduction of base rent. The tenant could not separately deduct optional improvement costs, but the lease credit itself was excluded.

What this means for you

• An unconditional rent credit reduced the taxable payment when it did not reimburse required tenant work.
• Optional improvement spending did not create an additional deduction.
• The ruling's formula was base rent plus additional rent, less the stated improvement credit.

Common questions

Q: Did the tenant need to make improvements to receive the credit?
A: No.

Q: Was the improvement credit taxable rent?
A: No. It reduced the base rent paid.

Q: Could the tenant also subtract its own optional improvement costs?
A: No. The Department allowed the contractual credit, not a separate deduction for optional costs.

Citations and references

• Fla. Stat. § 212.031(1)(c) — tax on commercial real-property rent
• Fla. Admin. Code r. 12A-1.070 — real property rentals and licenses
• Fla. Stat. § 213.22 — Technical Assistance Advisements

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 96A-039

Original ruling text

Jul 30, 1996

Re: Technical Advisement Assistance 96A-039
Real Property Improvement Credit
Section 212.031(1)(c), F.S.
Rule 12A-1.070, F.A.C.

Dear :

This is a response, styled a Technical Assistance Advisement, to
your letter dated December 29, 1995, and your subsequent
telephone conversation on or about April 8, 1996, wherein you
assert that the documentation you have provided the Department
in your letter dated December 29, 1995, satisfied the
requirements for the issuance of a Technical Assistance
Advisement as specified in Rule 12-11.003, Florida
Administrative Code. The Department, while noting that a Letter
of Technical Advice was issued in response to your letter,
agrees that a Technical Assistance Advisement construing the
same facts and documentation presented in your letter dated
December 29, 1995, should also be issued.

In your letter you ask the Department whether, in accordance
with a lease of real property, a copy of which you provided the
Department, an improvement credit described in Paragraph 1.4(b)
of the lease, which grants to the tenant such a credit without
requiring the tenant to make such improvements, is part of the
taxable rent.

You cite s. 212.031(1)(c), F.S., as the statutory provision
which imposes sales or use tax on the privilege of engaging in
the business of leasing, or granting a license to use, real
property.

Considering the above cited lease provision, you opine that the
improvement credit is not part of the taxable payment made by
the lessee to the lessor in exchange for the lease of, or a
license to use, the real property.

Department Response

The lease you provided the Department is styled Lease (herein
Lease), and it provides that XXXX herein Lessor), has leased to
XXXX (herein Lessee), what is described in Section 1.1 as the
"... entire rentable area on the twentieth (20th) floor [of a
certain building known as XXX, located in XXX]." Other rent
provisions include those set forth in Paragraph 1.4(a), Section
1.5, Section 1.6, Section 1.8, Article V, and in Section 25.2 of
the Lease.

The amount to be paid by Lessee to Lessor is described in
Paragraph 1.4(a) as "Base Rent." This paragraph provides that
the Base Rent shall be "... payable in equal monthly
installments of $22,842.00 ...." Such rent in this contract
provision is subject to certain increases as also provided in
this paragraph.

In Section 1.5, Article V, and in Section 25.2. another payment
required of the Lessee is described as "Additional Rent." This
payment includes certain taxes, expenses, charges, and
reimbursements to be paid by Lessee.

Paragraph 1.4(b) states in full that "[t]enant shall receive a
tenant improvement credit each year (regardless of any amount it
spends on tenant improvement, if any), which shall be credited
against monthly Base Rent...."

In considering these contract provisions the Department
concludes that the total rent subject to sales or use tax under
provisions of s. 212.031(1)(c), F.S., and as this statute is
interpreted in Rule 12A-1.070, F.A.C., does not include the
tenant improvement credit provided in Paragraph 1.4(b) because
such a credit operates as a reduction in the Base Rent to be
paid by the Lessee. Lessee, for purposes of computing the
imposition of sales or use tax, may not include any costs of
improvements to the demised property, during the term of the
lease, because such improvements are not mandated as a condition
of the Lease.

Contract provisions which also apply to improvements to the
demised premises are found in Section 3.1, Section 3.2, and in
Section 3.3 of the Lease.

The total rent subject to sales or use tax is the aggregate of
Base Rent, and Additional Rent, less the improvement credit.

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 the confidentiality
of such information, we request you notify the undersigned in
writing within 15 days of any deletions you wish made to the
request or the response.

Sincerely,

Robert G. Parsons
Tax Law Specialist
Tax Policy and Dispute Resolution

Ctrl. No.25564