Was a synthetic lease of improved Florida real property taxable as rent when its substance was a financing arrangement?

Plain-English summary

The Florida Department of Revenue concluded that the submitted synthetic lease was not subject to sales tax as a rental of real property. Although the documents called the arrangement a lease for financial-accounting purposes, its substance more closely resembled a mortgage or financing arrangement.

The trust held title to facilitate financing, while the lessee directed the improvements, bore the risk of loss, paid expenses, and was treated as the owner for purposes other than financial accounting. The rent equaled debt service rather than fair-market rental value, payments flowed to the lenders, and the lessee generally had to purchase the property at the end of the term unless it was sold to a third party.

Florida cited the principle that the name placed on a document does not control its tax treatment. The Department examined the parties' intent and the transaction's economic substance, including the allocation of ownership benefits and burdens.

The advisement expressly did not decide intangible taxes under Chapter 199 or documentary stamp taxes under Chapter 201. Its status line also directs readers to supplemental TAA 97A-017, which addresses an affiliated company's use of the property.

What this means for you

Businesses using synthetic leases

Calling a transaction a lease for accounting purposes did not make it taxable rent. Under these facts, the financing structure, debt-service-based payments, ownership treatment, and allocation of risk supported mortgage treatment.

Property owners, lenders, and trustees

Formal title in a trustee was not decisive. The Department looked at why title was held, where payments went, who controlled the property, and who bore the economic risks.

Accountants and tax professionals

Analyze the entire agreement rather than its label. This ruling was limited to sales tax on real-property rent and did not resolve Florida intangible or documentary stamp taxes.

Common questions

Q: Why was the synthetic lease not taxed as a real-property lease?
A: The Department found that the arrangement more closely resembled a mortgage because the lessee held the practical benefits and burdens of ownership and the payments functioned as debt service.

Q: Did the trustee's legal title make the arrangement a taxable lease?
A: No. The ruling said the trustee held title to facilitate the transaction and had no meaningful reversionary interest.

Q: Were the payments based on the property's rental value?
A: No. The ruling states that rent equaled amounts due to the lenders and bore no relationship to the improvements' fair-market value.

Q: Did the ruling cover every Florida tax consequence?
A: No. It specifically excluded intangible taxes under Chapter 199 and documentary stamp taxes under Chapter 201.

Citations and references

• Fla. Stat. § 212.031 — sales tax on renting, leasing, letting, or licensing real property
• Fla. Stat. § 697.01(1) — writings intended to secure payment are treated as mortgages
• Bridgestone/Firestone, Inc. v. Department of Revenue, DOAH Case No. 92-2483, 15 FALR 4874 (1993) — cited for examining intent and substance rather than the document's label
• Fla. Stat. § 213.22 — Technical Assistance Advisements

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 97A-001

Original ruling text

Status: See TAA 97A-017, issued March 18, 1997. (Supplement to
97A-001)

Jan 08, 1997

Re: Technical Assistance Advisement 97A-001
Sales and Use Tax; Financing Lease for Real Property

Section 212.031, Florida Statutes

Dear:

You have petitioned for a Technical Assistance Advisement
pursuant to Section 213.22, F.S., and Chapter 12-11, Florida
Administrative Code. The primary participants in the
transactions under review are XXX [Bank], XXX [Services]. XXX

[Real Estate], and XXX [Trustee].

ISSUE

The issue is whether certain described transactions, involving
improved real property, constitute a lease subject to sales tax
or a financing arrangement or mortgage which is not subject to

sales tax.

BACKGROUND

Your letter of November 13, 1996, stating that your client's

transaction involves a synthetic lease, provides in part:

... The synthetic lease has become a commonly used type of
financing transaction. The purpose of the financing lease

is to arrange for the acquisition and financing of property

in such a way that the property will be shown for financial
accounting purposes as a lease and effectively, as an "off
balance sheet" asset. For all other purposes, however, the
transaction is treated as a financing arrangement with the
"lessee" being treated as the owner of the property which

is the subject of the financing...

DESCRIPTION OF THE TRANSACTION

Your letter of October 3, 1996 provides in part:

Under the Participation Agreement, the Lenders agreed to
lend to the Trust the funds necessary to acquire the
Properties and to construct improvements on the Properties.
Upon the advance of the funds necessary to acquire a
property, the Trustee either acquires legal title to the

property or leases the property pursuant to a ground lease

in the form of the attached Ground Lease Agreement.[Bank]
as the construction agent under the Agency agreement, is
given responsibility for identifying the Properties that

will be acquired. Furthermore, [Bank] has agreed, under the
Agency Agreement to act as the construction agent on behalf
of the Trustee with respect to the construction of
improvements on the Properties (the "Improvements") and the
expenditures of construction advances related to the
Improvements. Upon completion of the Improvements to the
Property, the lessee under the Financing Lease Agreement

executes a Lease Supplement with respect to the Property.

In the past, [Bank] has served as a lessee under the
Financing Lease Agreement and construction agent under the
Agency Agreement, for each Property owned by the Trust.
[Bank] has recently formed [Real Estate]. Prospectively,
upon the election of [Bank], [Real Estate] will serve as

the lessee under the Financing Lease Agreement and the

construction agent under the Agency Agreement.

[Services] has acquired a parcel of land located in
Hillsborough County (the "Florida Land"). [Services] will
lease the Florida Land to the Trust under an agreement in
the form of the Ground Lease Agreement attached to this
request. The Ground Lease Agreement requires the Trust to
pay base rent of $1 per year. In addition, the Ground

lease is intended to be a net lease so that the Trust will

be responsible for payment of all taxes and assessments,
operating expenses, or any other cost, expense, or charge

related to the Florida Land.

Upon execution of the Ground Lease Agreement for the
Florida Land, [Real Estate], as construction agent under

the Agency Agreement, will arrange for the construction of
improvements on the Florida Land ("Florida Improvements").
The Florida Improvements and the Florida Land are referred
to collectively as the "Florida Property." The Florida
Improvements will be constructed in stages. The parties
anticipate that a lease supplement relating to each

separate building will be executed; however, it is possible
that an additional trust, containing terms identical to the
Trust, will be formed to finance the subsequent
improvements. In any event, [Real Estate], as lessee, will
execute and deliver to the Trustee (or successor trustee) a
Lease Supplement relating to each building as it is
completed. Upon execution of the Lease Supplement with
respect to the Florida Property, the Florida Property will

become subject to the Financing Lease Agreement.

In your letter of November 13, 1996 you provide in part:

1. Purpose of the transaction.... The [Bank] Transaction
   was Set up for financing both the acquisition of real
   property and the construction of improvements to real

property.... Relevant document provisions: Participation

Agreement, Section 1; Lease Agreement, Preface and Section

7.1.

2. Acquisition of Property.... Likewise, in the [Bank]
   transaction, all aspects of the improvements are directed
   by the "Lessee/Construction Agent". As stated in the
   October 3 advisement request, [Bank] was formerly the
   Lessee/ Construction Agent. Prospectively, the
   Lessee/Construction Agent will be [Real Estate]. Relevant

document provisions: Agency Agreement, Articles II and III;

Participation Agreement, Section 3.3.

3. Title in Trustee...., the Trustee in the [Bank]
   Transaction will have title to the improvements financed
   through the Trust solely for the purpose of facilitating
   the transaction. This is evidenced by the fact, as set

forth below, that the Lessee, not the Trustee, has total

responsibility for the risk of loss concerning the
improvements. The Trustee's ownership of the improvement

is a matter solely of title. Relevant document provisions:

Lease Agreement, Section 2.3 (no warranty of title), 4.1
(utility charges), 6.1 (net lease), 6.2 (no termination or
abatement), 7.1 (lessee as owner for all purposes other

than financial accounting purposes), 8.1 ("as is" lease),

10.1 (maintenance), 11.1 (modifications), 15.1 (casualty

and condemnation), 20.2 (required purchase option) and 24.1
(risk of loss on Lessee); Trust Agreement, Article IV
(collections and distributions) and Section 7.2 (Trustee's

fees and expenses to be paid by Lessee).

4. Application of Payments.... the Trustee in the [Bank]
   Transaction will turn over all payments received from the
   lessee to the lenders providing the financing. Relevant

document provision: Trust Agreement, Article IV.

5. Liability for Payments. Under the... Transaction, the
   Trustees had no personal liability for payments due to the
   lenders. The same is true under the [Bank] Transaction.
   Relevant document provisions: Trust Agreement, Sections

6.6, 6.7 and 7.1.

6. Rent Amount.... the "rent" amount paid by the lessee
   under the [Bank] Transaction will be exactly equal to the
   debt service amounts due to the lenders and will bear no
   relationship to the fair market value of the improvements.

Relevant document provisions: Participation Agreement,

Appendix A (definitions of "Basic Rent", "Loan Basic Rent",
"Lessor Basic Rent", "Supplemental Rent" and "Termination

Value").

7. Risk of Loss. All risks, including condemnation,
   casualty, market fluctuation and others will be borne by
   the Lessee in the [Bank] Transaction.... Also, the Lessee
   will be responsible for all maintenance of and other
   obligations relating to the improvements. Relevant

document provisions: Lease Agreement, Sections 2.3 (no

warranty of title), 4.1 (taxes and utility charges), 6.1

(net lease), 6.2 (no termination or abatement), 7.1 (Lessee

as owner for all purposes other than financial accounting
purposes, 8.1 ("as is" lease), 10.1 (maintenance), 11.1
modifications), 15.1 (casualty and condemnation), 20.2
(required purchase option) and 24.1 (risk of loss on

Lessee).

8. Foreclosure Language. The [Bank] TAA transaction
   documents,..., contain foreclosure language and anticipate
   that the transaction may be treated as a mortgage.

Relevant document provisions: Security Agreement

(generally); Lease Agreement, Section 17.5 (procedures if a

court determines that lease constitutes a mortgage).

9. Purchase Option.... In the [Bank] Transaction, the
   Lessee is not given a true "option" regarding the purchase
   --it is required to purchase the property at the end of the
   lease term absent a sale of the property to a third party.
   The purchase price is the "Termination Value" which means
   the total sum of all monies advanced to the Trust (plus
   accrued interest) to acquire the improvement held by the

Trust. Relevant document provisions: Lease Agreement,

Article XX; Participation Agreement, Appendix A (definition

of "Termination Value").

10. Lessee's Rights...., the Lessee in the [Bank]

Transaction is provided with rights consistent with an
ownership interest such as the right to grant or extinguish
easements and to consent to annexation or change covenants,
conditions and restrictions applicable to the property.

Relevant document provisions: Lease agreement, Section
8.2(e).

11. Structure. Consistent with the underlying purpose of a
    synthetic lease, the [Bank] Transaction,..., was, from its
    inception, structured with the understanding that it would
    be treated as "off balance sheet financing." The [Bank]
    Transaction will,..., be treated by the parties pursuant to
    FASB 13 as an operating lease but, for all other purposes,
    will be treated as a financing arrangement. That is, for
    federal, state and local taxation purposes, bankruptcy

purposes, commercial law, and real estate purposes and all

other purposes (other than financial accounting purposes)
the Lessee will be treated as the owner of the improvements
and will be entitled to all tax and other benefits

available to the owners of similar properties. Relevant

document provisions: Lease Agreement, Section 7.1.

12. Reversionary Interest.... The Lessor/Trustee in the
    [Bank] Transaction likewise retains no reversionary
    interest in the property or improvements. Relevant

document provisions: Lease Agreement, Section 17.7 (in

default scenario, Lessor to convey property to Lessee upon
Lessor receipt of Termination Value) and 22.2 (sale
proceeds to go first to Lessor's expenses, next to Lenders
to pay loan balances and then to Lessee); Trust Agreement,
Article VIII (balance of trust property to be distributed

to holders of certificates after payment of loans).

REQUESTED RULING

In your letter of November 13, 1996, you summarize your position

as follows:

... the transaction is a financing transaction and not a
lease and, as a result, no sales tax should be due on

payments made by the Lessee to the Lessor/Trustee.

LAW AND ANALYSIS

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 697.01(1), F.S, provides in part:

All conveyances, obligations conditioned or defeasible,
bills of sale or other instruments of writing conveying or
selling property, either real or personal, for the purpose

or with the intention of securing the payment of money,
whether such instrument be from the debtor to the creditor
or from the debtor to some third person in trust for the

creditor, shall be deemed and held mortgages, and shall be

subject to the same rules of foreclosure and to the same
regulations, restraints and forms as are prescribed in

relation to mortgages.

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). 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)

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 (affirmed by the
Department of Revenue in its final 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 leaseback 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.

SUMMARY

Under the terms and conditions of the documents presented
(referred to above as the [Bank] Transaction], it is our

position that the lease arrangement between the Trust (as
lessor) and [Real Estate] (as lessee) more closely resembles a
mortgage (i.e., a financing arrangement) and is therefore not

subject to sales tax under Section 212.031, F.S.

Note that this advisement does not address liability for
intangible taxes imposed by Chapter 199, F.S., or documentary

stamp taxes imposed by Chapter 201, F.S.

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,
Jonathan E. Swift
Tax Law Specialist

Tax Policy and Dispute Resolution

Control #26735