Was a synthetic real-estate lease treated as taxable rent or as mortgage financing for Florida sales, stamp, and nonrecurring intangible tax?

Plain-English summary

Florida recharacterized the synthetic lease as mortgage financing rather than a taxable real-property rental.

The trustee held title solely to facilitate financing for property selected, developed, controlled, and used by the borrower. Rent equaled the lender interest payments rather than fair-market rental value. The borrower bore maintenance, casualty, condemnation, environmental, and market risks, had unusual ownership-type control rights, and faced strong economic pressure to buy or arrange a sale at the end of the term.

The Department concluded that the transaction's substance resembled a mortgage. The recorded lease was therefore subject to documentary stamp tax and nonrecurring intangible tax based on the document's stated limitation on recovery, while the periodic payments were not subject to rental sales tax.

Supplemental Lease No. One was subject to documentary stamp tax on its limitation amount but not to nonrecurring intangible tax or sales tax. The Department found no additional stamp, intangible, or sales tax due on the other presented documents.

What this means for you

• A document labeled a lease can be treated as financing when the borrower holds the economic benefits, burdens, and risks of ownership.
• Rent tied exactly to loan interest and the titleholder's limited trustee role supported mortgage treatment.
• Recharacterization removed rental sales tax but triggered mortgage-related stamp and intangible taxes on the stated limitation amounts.

Common questions

Q: Were the synthetic lease payments subject to sales tax?
A: No.

Q: Was the recorded lease tax-free?
A: No. It owed documentary stamp and nonrecurring intangible tax based on the recovery limitation.

Q: How was Supplemental Lease No. One taxed?
A: Documentary stamp tax applied to its limitation amount; nonrecurring intangible and sales tax did not.

Citations and references

• Fla. Stat. § 199.133 — nonrecurring intangible tax on mortgage-secured obligations
• Fla. Stat. § 201.08 — documentary stamp tax on mortgages and secured obligations
• Fla. Stat. § 212.031 — tax on real-property rentals
• Fla. Stat. § 697.01 — security instruments treated as mortgages
• Bridgestone/Firestone, Inc. v. Department of Revenue, DOAH Case No. 92-2483, 15 FALR 4874 (1993) — substance-over-form financing analysis cited by the Department
• Fla. Stat. § 213.22 — Technical Assistance Advisements

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 96M-002

Original ruling text

Title:

Lease Payments - Rental or Mortgage?

Jun 21, 1996

Re: Technical Assistance Advisement No. 96(M)-002
Documentary Stamp Tax, Intangible Tax, and Sales Tax;
XXX (hereafter Borrower/Lessee);
XXX (hereafter Guarantor);
XXX (hereafter Trustee/Lessor);
XXX (hereafter Lender);
XXX (hereafter Certificate Purchaser);

Dear :

You have petitioned for a Technical Assistance Advisement
pursuant to s. 213.22, F.S, and Chapter 12-11, Florida
Administrative Code.

Issue

Whether the Lease is treated as a lease for sales tax or as
a mortgage for documentary stamp tax and intangible tax. The
issue does not address a transfer of an interest in real
property.

Statement of Facts

a. General overview. The taxpayers requesting this Technical
Assistance Advisory are collectively parties to a synthetic
lease transaction. A synthetic lease transaction is a
method to finance the acquisition of property, which is
structured in a manner whereby the acquiring owner of that
property may treat the transaction as an acquisition of
real estate with purchase money financing for economic and
federal tax purposes, and may treat the same transaction as
an operating lease obligation for financial accounting
purposes.

Generally, a line of credit is established by a lender and
a certificate purchaser in favor of a trustee. At the
request of the owner/acquiror of the real property, the
trustee borrows from the line of credit, purchases the
property, and immediately leases the property to the
owner/acquiror on a short-term lease. The lease is
structured so that all incidents of ownership of the
property belong to the owner/ acquiror, and that the lease
payments to the trustee are identical to the trustee's
payments to the lender and certificate purchaser. At the
end of the lease the lessee has the option to acquire the
ownership of the property for the loan balance and has
guaranteed payment of 85% of the loan balance, if it fails
to exercise the option to purchase.

b. Overview of Documentation. The relevant documentation for
this transaction was attached to the request. On or about
XXX, documents were executed setting up a master syndicated
lease structure for future real estate acquisitions of
Guarantor and its subsidiaries. The parties to these
documentations and their roles are:

(i) Lender, which functions under the documents as
both a direct lender and as lender's agent for
certain other participating lenders involved in
the transaction. Lender is referred to in the
documents as the Lender and as the Agent.
(ii) The Certificate Purchaser is a lender by virtue of
purchasing participation certificates under the
documentation.
(iii) The Trustee/Lessor functions in a trustee role.
The Trustee/Lessor is variously referred to in the
documents as the Lessor or as the Certificate
Trustee.
(iv) Guarantor is the guarantor of payments due under
the lease and the other loan documents and is
sometimes referred to as the Guarantor and
sometimes referred to as the Construction Agent.
(v) The Borrower/Lessee is a fourth level operating
subsidiary of Guarantor. Borrower/Lessee is an
operating company who has joined the documentation

as a Lessee and is the company which wishes to
acquire Florida real estate with the synthetic
lease financing structure.

The documents creating and governing the synthetic
lease credit facility are set forth as XXX. The
Participation Agreement (XXX) establishes a line
of credit and procedure for drawing against that
line of credit. The line of credit is to be drawn
against as individual properties to be acquired by
Guarantor and/or its subsidiaries are identified
and subsequently acquired. Pursuant to the
Participation Agreement, a Loan Agreement (the
Loan Agreement) (XXX) was entered among the
Trustee/Lessor and the Lender establishing the
referenced line of credit from the lenders.
Pursuant to the Loan Agreement the Trustee/Lessor
executed a XXX Note payable by the Trustee/Lessor
to the Lender in the principal amount of $XX
(XXX), and a XXX Note in the amount of $XX (XXX).
A Construction Agency Agreement (XXX) was executed
by and between the Guarantor and the
Trustee/Lessor whereby the Trustee/Lessor
appointed the Guarantor as the exclusive agent for
constructing improvements on the designated real
property. The Construction Agency Agreement was
assigned (XXX) by the Trustee/Lessor to the Lender
as security for the loans. A Guaranty Agreement
(XXX) was executed by the Guarantor in favor of
all of the parties to the transaction guaranteeing
all payments under the anticipated future leases
and under the line of credit. A Trust Agreement
(XXX) was entered appointing the Trustee/Lessor as
trustee of the participation certificates and
pursuant to which the Trustee/Lessor agreed to
hold certain real property as trustee to
facilitate the transactions contemplated by the
Participation Agreement.

The Borrower/Lessee has now identified a parcel of
Florida real estate which it desires to acquire,

improve and use in its business activities in the
State of Florida. It is proposed that this real
estate be acquired pursuant to the synthetic lease
structure set up in XXX. Pursuant to the terms of
the Participation Agreement, the Guarantor will
identify to the Trustee/Lessor certain Florida
real estate in a Florida County which will be
acquired by the Borrower/Lessee pursuant to the
synthetic lease documents. Also, pursuant to the
Participation Agreement, several additional
documents will be executed in connection with the
acquisition of the Florida property. XXX.

First, the Borrower/Lessee will execute a Joinder
making it a party to the other documents (XXX).
After the acquisition of the property by the
Trustee/Lessor at the request of Guarantor (paying
appropriate transfer taxes on the deed), the
Trustee/Lessor will immediately lease the property
to the Borrower/Lessee pursuant to a Lease (the
Lease Agreement) (XXX) which will be recorded.
Lease Supplement No. One (XXX) will be executed
and also recorded evidencing the Lease. As
additional security for the line of credit loan,
the Trustee/ Lessor will execute and record a
Mortgage and Security Agreement (XXX) on the real
estate in favor of the Lender and will also
execute and record a Supplement to Assignment of
Leases which contains a copy of the previously
executed Assignment of Leases (collectively the
"Assignment of Leases"), to which the
Borrower/Lessee will consent (XXX). Trust
Supplement No. Three will be executed and recorded
for title purposes; however, this document does
not create or evidence a security interest. (XXX).
Finally, the Borrower/Lessee will execute a
Supplement to Construction Agency Agreement (XXX).
The Lease, Lease Supplement, Mortgage, Assignment
of Leases, and Trust Supplement will be recorded.
The other documents will not be recorded.

c. Detailed Description of the Transaction. This transaction
can be fairly summarized as a type of "off balance sheet"
financing arrangement. In this case, the Lender and the
Certificate Participants agree to extend a credit facility
for the benefit of Guarantor and its subsidiaries.
Borrower/ Lessee, a subsidiary of Guarantor, has joined the
Agreement for purposes of making a Florida real estate
acquisition. Mechanically, the line of credit is extended
to a third-party trustee in a trust capacity. The line of
credit from the lenders is supported by promissory notes
executed and delivered outside the State of Florida.
Thereafter, at the request of the Guarantor, and at the
Guarantor's express direction, the Trustee/Lessor uses
funds from the line of credit to acquire and improve real
property for the benefit of Borrower/Lessee. In this
process, the Trustee/Lessor appoints Guarantor as the
exclusive agent for acquiring and improving the property.
The property is thereafter immediately leased to the
Borrower/Lessee pursuant to the Lease.

The terms of the Lease are unlike a typical lease. The
lease term is for a period of five (5) years with an option
to renew. The "rent" on the Lease is exactly equal to the
interest on the Loan by Lender to the Trustee/Lessor and
the yield on the investment by the Certificate
Participants. Amounts received by the Trustee/Lessor as
"rent" are forwarded to the Lender and the Certificate
Participant. In addition, under the Lease, the
Borrower/Lessee has a host of rights and liabilities which
are different than a typical lease situation. Not only is
the Borrower/Lessee totally responsible for all the
charges, insurance, taxes, and other costs associated with
ownership of the property, but has no recourse or reduction
in rent for property defects, damage to the property, title
defects, offsets, restrictions or interference with use or
similar conditions. All maintenance obligations are
imposed on the Borrower/Lessee who accepts the property in
"as is" condition with no warranty of title. In addition,
the Borrower/Lessee has the unique right to grant or
terminate easements, public dedications and annexations,
and to modify covenants, conditions, and restrictions. So

long as no default has occurred under the Lease, casualty
and condemnation proceeds belong to the Borrower/Lessee
with no reduction in rent. All environmental issues and
problems are at the cost and expense of the
Borrower/Lessee.

Upon the termination of the Lease, the Borrower/Lessee has
the option to purchase the property for the loan and
certificate principal balance applicable to that particular
property (the Property Balance). Because of the purchase
option, the Borrower/Lessee owns the entire "upside"
potential of the property. In the event of a significant
condemnation, environmental problem or casualty, the
Borrower/Lessee is required to buy the property for the
Property Balance. In the event that the Borrower/Lessee
elects not to purchase the property at the end of the term,
or in the event it selects a remarketing option provided
for in the documents, the Borrower/Lessee is required to
pay a significant penalty to the Trustee/Lessor in the form
of a "Recourse Amount" which is 85% of the Property
Balance. Because of the complicated way in which payments
are applied, in the event of sale by the Lessor or
remarketing, sale proceeds are applied first to the
nonrecourse amount and then to Recourse Amount with the
Borrower/Lessee being required to fully restore the
Recourse Amount. In the unlikely event that the sale
proceeds are less than the nonrecourse amount, the
Borrower/Lessee is still required to make up the shortfall
if such shortfall is attributable to an enumerated list of
actions or omissions of the Borrower/Lessee. Hence, the
possibility that the payments made by the Borrower/Lessee
to the Trustee/Lessor would ever be less than the amounts
owed on the loan and the certificate are extremely remote.
Therefore, the "down-side" potential of the property also
belongs to the Borrower/Lessee.

Also, upon the termination of the lease, the lessee is
required to purchase the leased property or to sell the
property to a third party. The possessory interest never
reverts to the lessor at the end of the lease.

Because of the purchase option and Recourse Amount
guaranty, the burdens and benefits of property ownership
belong to the Borrower/Lessee.

The Lease documentation contains foreclosure language
appropriately associated with a mortgage. The Lease
contains appropriate language limiting recovery to the
amount advanced for the Florida acquisition, and
improvements, if any (i.e. $XX which will be a fixed amount
not yet determined, but which will be determined prior to
execution). Each of the recorded security documents also
contain a similar limitation (which has been left blank in
the documents submitted) which will also be equal to $XX.
A detailed description of specific document terms is set
forth below.

d. Accounting. From an accounting standpoint, the transaction
is treated as an operating lease to the Borrower/Lessee.
For federal income tax purposes the transaction is treated
as an acquisition of the property directly by the
Borrower/Lessee using Lender provided financing for this
purpose. Under the FASB 13 accounting criteria for leases,
in order to be treated as an operating expense on the
accounting balance sheet a lease must meet four specific
criteria. If any one of these criteria is failed, the
lease is capitalized similar to a loan.

For federal income tax purposes, the Borrower/Lessee treats
the property as its own. The Borrower/Lessee claims all
deductions for depreciation on the property, and interest
expense on the loans. The Borrower/Lessee takes no
deduction for rental payments. The Trustee/Lessor is
treated for federal tax purposes simply as a conduit, and
the Lender treats the payments as interest income.

e. Detailed Description of Documents. The specific relevant
provisions of each of the agreements and documents follow.
XXX is a listing of the defined terms listed throughout the
documents. The Borrower/Lessee has or will become a party
to the documents by virtue of the execution of a Joinder
(XXX).

(i) XXX, Participation Agreement. This document sets
forth a good general overview of the transaction
and the responsibilities and obligations of
various parties. In particular, this document
contains the following:

XXX sets forth a procedure whereby at the request
and direction of the Guarantor, the Trustee/Lessor
buys land specified by the Guarantor with funds
borrowed from the Lender, and the Certificate
Purchaser agrees to improve the land and lease the
land and improvements to the Borrower/Lessee under
the general terms and conditions set forth in the
Lease.

XXX set forth the commitments of the Lender and
Certificate Purchaser to make advances to the
Trustee/Lessor for the purposes of fulfilling the
Trustee/Lessor's obligations under XXX.

XXX set forth certificate earnings and interest to
be paid on the amounts borrowed. Interest is
calculated based upon the definition of "Basic
Rent." Basic Rent is the combination of "Lender
Basic Rent" and "Certificate Purchaser Basic
Rent." Certificate Purchaser Basic Rent crossreferences to the definition of "Certificate
Earnings" which further cross-references to a
Eurodollar rate, which is an interest rate based
upon "LIBOR". Lender's Basic Rent is defined by
cross-referencing to XXX of the Lease, which
further cross-references interest to be paid on
loans, which further cross-references the XXX loan
and the XXX loan as set forth in XXX of the Loan
Agreement. XXX of the Loan Agreement references
the Eurodollar rate which again is the "LIBOR"
rate. Rent is not tied to the rental value of the
property.

XXX sets forth certain intentions of the parties

including the fact that Basic Rent will be equal
to the interest on the Loans and the Certificate
Earnings, and if a lessee elects the Purchase
Option set forth in the Lease that the Property
Balance will be paid by the Borrower/Lessee, and
that if the Repurchase Option is selected, the
Recourse Amount will be paid by the
Borrower/Lessee. The Recourse Amount is a
critical element of this transaction and is more
fully detailed in an explanation of the Loan
Agreement set forth below.
XXX requires an appraisal prior to funding
certifying that the fair-market value of the
property to be funded will not be less than the
Property Balance (i.e. the loan and certificate
balance attributable to the specific property
acquired) as of the end of the construction period
and also at the end of the five-year term of the
lease.

XXX require the Guarantor to pay all of the
transaction costs connected with setting up the
original master loan and acquiring the individual
parcels.

XXX provides a procedure for replacing a
Certificate Purchaser who fails or refuses to
renew a Lease which the Borrower/Lessee wants to
renew which in essence provides for a purchase of
that Certificate Purchaser's loan balance.

XXX contains significant indemnifications whereby
the Guarantor and the Borrower/Lessee indemnify
the Lender, Certificate Purchaser, and the
Trustee/ Lessor for and against any and all
liabilities associated with the documents and
fairly extensive issues relating to the property.

XXX requires the Borrower/Lessee to pay a
"Shortfall Amount" if the Remarketing Option is
selected. Through the definition of Shortfall

Amount, if the sale proceeds from remarketing the
property, together with the Recourse Amounts are
insufficient to fully pay the Property Balance,
then the Borrower/Lessee is required to pay the
shortfall amount unless it can be established that
the Shortfall Amount was due to general economic
depreciation in the marketplace rather than one of
the enumerated specific items that would cause a
shortfall.

XXX contain full indemnities by the Guarantor and
the Borrower/Lessee for environmental matters and
tax matters.
(ii) XXX - Loan Agreement. This document runs from the
Lender to the Trustee/Lessor.

XXX set forth the XXX and XXX loan commitments.
Pursuant to the general definitions, the Recourse
Amount is the XXX amount. Pursuant to Schedule
XXX, the XXX amount is $XX and the XXX amount is
$XX.

XXX sets forth the interest rate.

XXX indicates that XXX and XXX borrowings are
always pro rata.

XXX indicates that if the Remarketing Option is
selected, or if the Trustee/Lessor otherwise sells
the property (even after expiration of the Term)
then the proceeds will be first applied to the XXX
amount. Under the Lease, there are four general
scenarios for terminating the Lease. The first is
the Borrower/Lessee's exercise of a Purchase
option by purchasing the property for the Property
Balance (i.e. the balance owed on the particular
property). The second is the Borrower/Lessee's
purchase of the property because of a significant
condemnation or casualty which requires purchase
for the Property Balance. The third is the
selection by the Borrower/Lessee of the

Remarketing option which requires payment by the
Borrower/Lessee of the Recourse Amount and the
Shortfall Amount. The fourth involves an
expiration of the term of the Lease, a
reacquisition and a sale of the property by the
Trustee/Lessor which requires the Borrower/ Lessee
to pay the Recourse Amount and the Shortfall
Amount.

In the event that the Remarketing Option is
selected, or in the event that the Trustee/Lessor
reacquires and sells the property, the proceeds of
such sale are applied first to the XXX loan which
is the nonrecourse portion, then the Recourse
Amount is paid (up to 85% of Property Balance).
Since the Recourse Amount would be an amount up to
85% of the Property Balance prior to application
of sale proceeds, the economic risk to the Lender
is minimal.
(iii) XXX - Notes. The XXX notes and XXX notes are
fairly standard form promissory notes and each was
executed outside the State of Florida. Each of
the notes is strictly nonrecourse to the
Trustee/Lessor and is to be paid solely from rent,
guaranty payments and other amounts received from
the Borrower/Lessor or the Guarantor.
(iv) XXX - Construction Agency Agreement. XXX of this
Agreement appoints the Guarantor as the exclusive
construction agent on the properties to be
purchased through the facility and basically gives
the Guarantor full authority and control over the
construction. A Supplement to Construction Agency
Agreement will be executed by Borrower/Lessee.
(v) XXX - Security Documents. The security documents
consist of the Assignment of Leases, Assignment of
Construction Agency Agreement, Mortgage and
Guaranty. Each of these documents is a fairly
standard form of document. The Lease, Lease
Supplement and Mortgage, will be recorded in the
State of Florida. The Assignment of Leases is
recorded via recordation of the Supplement of

Assignment of Leases which contains a copy of the
Assignment of Leases. The original Assignment of
Leases, the Assignment of Construction Agency
Agreement and the Supplement to Construction
Agency Agreement will not be recorded. The
Security Documents each secure the entire credit
facility advanced to the Trustee/Lessor, but each
of these documents which are to be recorded
contains an appropriate limitation of the amount
secured to $XX, which is 110% of the approved
value of the Florida property. The limitation is
incorporated in the Assignment of Leases by virtue
of amending language contained in the Supplement
to Assignment of Leases. The Guaranty executed by
Guarantor guarantees both the Borrower/Lessee's
payments under the Lease, and the payment of the
notes to the Lender and is not to be recorded.
Documentary stamp tax on a tax base of $XX will be
paid on the Mortgage.
(vi) XXX - Trust Agreement and Trust Supplement No.
Three. XXX of this Agreement creates the trusts
by declaration. The Trustee/Lessor in its
capacity as trustee is to act solely in that
capacity and in its capacity as trustee is not to
carry on any other business. The trust is not a
business trust and it is created solely to
facilitate the financing of the overall
transaction.

Under Article II, the Trustee/Lessor collects
payments, accounts for payments, distributes them
to the appropriate payees, and registers the
holders of certificates for participation in the
loan.

XXX contains extensive indemnities protecting the
Trustee/Lessor from deal risks and property
ownership risks.

The Trust Supplement will be recorded in Florida.
(vii) XXX - Lease. The Lease contains the following

terms and provisions:

XXX sets forth a Term of five (5) years. Trustee/
Lessor does not warrant any title under the lease.

XXX sets Basic Rent in an amount equal to interest
only payments under the Loans and the
Certificates.

XXX defines Supplemental Rent as including all
other amounts payable under these collective
documents.

XXX releases the responsibility for all utility
charges on the Borrower/Lessee.

XXX indicates that there will be no reduction in
rent for defects in the property, damage to the
property, restrictions or interference with the
Borrower/Lessee's use, title defects, offsets,
government action affecting the use of the
property, and nonperformance by the
Trustee/Lessor. In other words, all burdens of
property ownership are placed on the
Borrower/Lessee without recourse to the
Trustee/Lessor.

XXX limits the right of the Borrower/Lessee to
terminate the lease.

XXX grants the Trustee/Lessor a fixture security
interest under the Uniform Commercial Code.

XXX is an acceptance of the premises by the
Borrower/Lessee in "as is" condition.

XXX places all maintenance obligations on the
Borrower/Lessee and contains a waiver of any right
to have the Trustee/Lessor repair defects in the
premises.

XXX provides that if the Borrower/Lessee shall
select the Remarketing option, or if the Trustee/
Lessor is required to sell the property, the
Borrower/Lessee will pay the Recourse Amount, and
makes the surrender of the property at the end of
the Term subject to the provisions of XXX of the
Participation Agreement.

XXX gives the Borrower/Lessee certain unique
rights uncommon to tenants including the right to
grant easements, release easements, dedicate
portions of the property to public purposes,
consent to annexation and modify covenants,
conditions and restrictions.

XXX makes the proceeds of an insignificant
casualty or condemnation belong to the
Borrower/Lessee with no termination of the Lease
or reduction in rent.

XXX together require the Lease to be terminated
and require the Borrower/Lessee to purchase the
property for the Property Balance upon a
significant condemnation, environmental issue or
casualty, provided, however, the Borrower/Lessee
may, at the Borrower/Lessee's option, substitute
suitable replacement property and continue the
Lease.

XXX contains the typical default remedies for a
Lease; however, XXX contains appropriate language
for the allowance of a foreclosure action to the
effect this Lease would be deemed a mortgage under
Florida law. XXX contains a limitation on
recovery to ($XX) which is 110% of the approved
value of the Florida property and indicates that
if the lease is considered to be a mortgage, it is
additional collateral for the obligations secured
by the Mortgage.

XXX provides for the Borrower/Lessee to have a

Purchase Option upon any declaration of default
with respect to a particular property.

XXX contains the option of the Borrower/Lessee at
the end of the term to purchase the property for
the then current Property Balance. The property
balance is the amount of the total loan and
certificate balance attributable to the property
in question. As only interest is due on the loan
and certificate, the property balance at the end
of the lease term should be equal to the original
purchase price.

XXX provides an alternate method at the end of the
Lease for the Borrower/Lessee to choose a
Remarketing Option and sell the property using
sale proceeds to pay off the loan and certificate.

A copy of the Lease will be recorded.
(viii) XXX - Lease Supplement. This is a document to be
recorded evidencing the Lease. The document also
contains an appropriate limitation on recovery
similar to that contained in the above-described
security documents.

Questions Presented

1. Will the Lease be treated as a lease thereby subjecting
   "rental payments" under the lease to sales tax pursuant
   to s. 212.031, F.S., as a mortgage thereby potentially
   subjecting it to documentary stamp tax under s 201.08,
   F.S., and Intangible Tax pursuant to s. 199.133, F.S.,
   or as neither a lease nor a mortgage?
2. Assuming that the Lease is treated as a mortgage, and
   further assuming that the appropriate documentary stamp
   tax and intangible tax is paid on the mortgage, will
   the Lease be subject to (a) additional documentary
   stamp tax under s. 201.08, F.S., or (b) additional
   nonrecurring intangible tax?

Law and Analysis

1. Classification of the Lease Document. Section 212.031,
F.S., imposes sales tax on the business of "renting,
leasing, letting, or granting a license for the use of
any real property..."
Section 201.08, F.S., imposes documentary stamp tax on
"... mortgages, trust deeds, security agreements or
other evidences of indebtedness filed or recorded in
the state...."

Section 199.133, F.S., imposes a nonrecurring
intangible tax on the "just valuation of all notes,
bonds and other obligations pertaining to money which
are secured by mortgage, deed of trust or other lien
upon real property situated in this state."

Section 697.01, F.S, requires all instruments conveying
property with the intention of securing the payments of
money to be treated as a mortgage.

The legislature excluded certain rentals in Chapter
212.02, F.S., (1995) from the definition of "Business".
That section states in part:

(2) "Business" means any activity engaged in by any
person, or caused to be engaged in by him or her, with
the object of private or public gain, benefit, or
advantage, either direct or indirect..., but includes
other charges for the sale or rental of tangible
personal property... all rentals of or licenses in real
property.... The term "business" subleasing, or
licensing of real property by one corporation to
another if all of the stock of both such corporations
is owned, directly or through one or more wholly owned
subsidiaries, by a common parent corporation; the
property was in use prior to XXX, title to the property
was transferred after XXX, and before XXX, between
members of an affiliated group, as defined in s.
1504(a) of the Internal Revenue Code of 1986, which
group included both such corporations and there is no
substantial change in the use of the property following

the transfer of title; the leasing, subleasing, or
licensing of the property was required by an unrelated
lender as a condition of providing financing to one or
more members of the affiliated group; and the
corporation to which the property is leased, subleased,
or licensed had sales subject to the tax imposed by
this part of not less than $XX during the more recent
12 month period ended XXX.... (Emphasis supplied)

The Department of Revenue and the Florida Division of
Administrative Hearings have recognized that under
certain circumstances, for tax purposes, a document
structured as a lease may be treated as a mortgage.
Bridgestone/ Firestone, Inc. v. Department of Revenue,
DOAH Case Number 92-2483, 15 FALR 4874 (1993). A copy
of Bridgestone/ Firestone is attached as XXX. The
Administrative Hearings Officer in
Bridgestone/Firestone stated "although a document may
be called a lease on its face, this in itself is not
dispositive of the issue. Rather, in order to properly
determine the true nature of the transaction, it is
necessary to examine the intention of the parties and
the substance of the agreement." (Paragraph 23)
Additionally, the hearing officer also stated
"initially, it is noted that a taxpayer can treat an
item one way for financial recording purposes and
another way for tax purposes... a taxpayer can report a
transaction as a lease in its financial statement, but
as a financing transaction for tax purposes".
(Paragraph 24)

As defined in Sections 212.02(2), F.S., above, all
other real property rental transactions, including
those part of a financing arrangement, are considered
to be part of engaging in business, except for the one
excluding between XXX, and XXX. Here, title to the
property was transferred after the statutory time limit
of XXX. Since all other real property rentals are
considered by statute as engaging in business, the
rentals are subject to the provisions of Section
212.031, F.S. However, a lease agreement may be

construed separately as a mortgage.

In Bridgestone/Firestone, a sale leaseback transaction
was examined. In that case, it was determined that the
transaction taken as a whole was a financing
transaction (recharacterized as a mortgage by the
Department of Revenue order) rather than a lease. In
particular, great emphasis in the case was placed upon
the fact that the transaction was structured
specifically to have the transaction treated as a lease
for accounting purposes, yet still have the overall
economic substance of the transaction treated as
financing for federal tax purposes. In particular, the
taxpayer did not treat the sale lease back as a sale,
continued to depreciate the property, and reported
payments as principal and interest. Additionally, the
rental value was based upon the value of the
consideration (interest) for the financing, not upon
the fair-market rental value of the property. The
obligations of the tenant continued even in the case of
condemnation, etc., and the risk of loss stayed with
the tenant.

The facts of the synthetic lease transaction at issue
even more closely resemble a mortgage than those
contained in Bridgestone/Firestone. In this case, the
financing portion of the transaction was set up
specifically and for the sole purpose of financing the
acquisition of property for the benefit of the
Borrower/Lessee and other subsidiaries of the
Guarantor. The acquisition of the property and all
aspects of its development are directed by the
Borrower/Lessee or the Guarantor. The Trustee/ Lessor
holds title in a trust arrangement solely to facilitate
the transaction and is compensated by fee. All
payments under the Lease are directly turned over to
the Lender for application on the loan. The
Trustee/Lessee has no personal liability for payments.
"Rent" is exactly equal to interest on the loan and
bears no relationship to the fair-market rental value
of the property. All risk of loss, maintenance,

environmental issues, condemnation, casualty and the
like rest with the Borrower/Lessee and do not reduce
the rent. The document anticipates that it may be
treated as a mortgage for foreclosure purposes and
contains foreclosure language. While the lessee has no
obligation to purchase the property at the end of the
term, it does have the option and also has an extremely
strong economic reason for doing so in that the
recourse amounts payable by the Borrower/Lessee if the
purchase option is not selected would under most
conceivable scenarios put the Borrower/Lessee in the
same position economically as if the purchase option
had been selected and then the property subsequently
sold to a third-party purchaser. In other words, the
economic risk of loss for a fluctuating market is
placed on the Borrower/Lessee. The Borrower/Lessee has
certain extraordinary rights to grant or vacate
permanent easements, and to consent to annexation or
change covenants, conditions and restrictions
applicable to the property. Lastly, the transaction was
structured by all parties with the understanding that
it would be treated as "off balance sheet financing"
from its inception.

The Final Order in Bridgestone/Firestone included in
part the following:

Further, the cases construing what constitutes a
"mortgage" under s. 697.01, F.S., provides a better
basis for determining what constitutes a "lease" under
Chapter 212.12, F.S., than does federal income tax law.

The estate of the lessor during such time is limited to
his reversionary interest, which ripens into perfect
title at the expiration of the lease. State Road Dept.
v. White, 148 So.2d 32 (Fla. 2nd DCA 1962), cert dismd,
161 So.2d 828 (Fla. 1964). Rogers v. Martin 87 Fla
204, 99 So 551 (Fla. 1924).

Here, unlike State Road Dept. and Rogers, the lessor
never gains full title at the end of the lease. Here,

as in Bridgestone, the lessee is obligated to pay the
remaining purchase price at the end of the lease either
by purchasing the property or selling the property to a
third party. Since the lessor has no reversionary
interest, the lease agreement construed separately
resembles a contract for deed, which is entitled to
mortgage protection.

Assuming the Lease is treated as a mortgage, the
payment of rental amounts would not be subject to sales
tax.

2. Documentary Stamp Tax. Assuming that the Lease is
   treated as a mortgage, it is necessary to determine the
   documentary stamp tax and intangible tax consequences
   of such a classification. Documentary stamp tax and
   intangible tax on the amount to which recovery is
   limited (i.e. $XX) will be paid on the Mortgage.
   Language is contained in the other recorded security
   documents (i.e. the Lease, Lease Supplement and
   Assignment of Leases), to the effect that recovery
   under the document is limited to the specific dollar
   amounts, and to the effect that such document is
   additional collateral for the obligation secured by the
   Mortgage.

You asked in the revised request that the Department
rule on the documentary stamp tax and non-recurring
intangible tax implications of the lease, as the
documentary stamp tax and intangible tax will be paid
on the mortgage based on the limitation amount.
Further, the documentary stamp tax will be paid on the
lease supplement No. One based on the limitation
amount. However, the nonrecurring intangible tax is
not due on the recordation of the lease supplement No.
One.

Department's Position

Based on the facts, law, and analysis as presented, the
recorded lease will be considered a mortgage and subject to the

documentary stamp tax and the nonrecurring intangible tax based
on the limitation amount. Further, since the lease is a
mortgage and not a rental, the sales tax imposed under Chapter
212, F.S., will not be due. In addition, the recorded
supplemental lease No. One will be taxable for the documentary
stamp tax based on the limitation amount and will not be subject
to either the non-recurring intangible tax or the sales tax. No
other documentary stamp tax under s. 201.08, F.S., intangible
tax, or sales tax will be due on the documents presented.

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,

James E. Silvey
Tax Law Specialist
Tax Policy and Dispute Resolution
Office of General Counsel

J.V. Parramore, Jr.
Tax Law Specialist

Tax Policy and Dispute Resolution
Office of General Counsel

Daniel M. Wagner, Jr.
Tax Law Specialist
Tax Policy and Dispute Resolution
Office of General Counsel

JES/JVP/DW/mh