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

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