What Florida sales, documentary stamp, intangible, and property taxes applied to a county facility lease-and-leaseback financing?

Subject

Real Property Lease-Leaseback

Plain-English summary

Florida TAA 98A-042 analyzed four tax systems for a transaction in which a county leased a public facility to an investor-owned trust, that trust subleased it to a county-owned trust, and the county-owned trust sub-subleased it back to the county for continued operation.

The operative answers were conditional and narrower than the PDF's opening summary.

Sales and use tax

No sales tax applied to the described head-lease, sublease, or sub-sublease payments if the required registrations and resale certificates were in place before the transactions. The county's direct payments under the final sub-sublease were exempt government purchases. For the two upstream leases, each intermediate trust released substantially all the same property and could use a resale certificate to prevent pyramiding tax on the same occupancy.

The head trust and county-owned sublessee both had to be registered Florida dealers before closing and provide resale certificates to their respective lessors. The Department also compared the payment streams and found that rent did not decrease through the lease chain.

Documentary stamp tax

The approximately $65 million advance rent payment was not documentary-stamp taxable because the agreements required return of the unearned amount after specified early terminations, losses, burdensome events, or defaults. That refund feature meant the lessees were not buying a definite real-property interest through prepaid rent.

The lease instruments themselves were not taxable obligations under section 201.08. But the TAA did not give every future step a blanket exemption: consideration paid if the purchase option was exercised would be subject to documentary stamp tax under section 201.02(1). Consideration connected with the specified statutory merger would not be taxed.

Intangible tax

Only the county could operate the facility, and operation had to continue for a governmental or public purpose. The Department therefore treated the investor trust's governmental leasehold estate as exempt from intangible tax. Other intangible property arising from the transaction remained outside the tax only while its ownership, management, and control stayed outside Florida.

Ad valorem property tax

The Department said the county-owned facility appeared exempt while used for a public purpose, but expressly made that discussion nonbinding. Florida county property appraisers—not the Department of Revenue—had authority and responsibility to classify the real estate and leasehold for ad valorem tax.

What this means for you

Structured leasebacks do not receive one all-purpose tax answer. Dealer registration timing and resale certificates drove sales tax; refundability of prepaid rent drove documentary stamp tax; public use and out-of-state control drove intangible tax; and the county property appraiser retained the property-tax decision.

The source's opening summary says no listed tax applied to any portion of the transaction, but the detailed response says purchase-option consideration would be documentary-stamp taxable if the option was exercised and that the ad valorem discussion was not binding. This page follows the detailed response.

Common questions

Q: Were all three lease payment streams sales-tax exempt? Yes on the stated facts, provided the two intermediate trusts registered as Florida dealers before the transactions and issued proper resale certificates.

Q: Why was the large prepaid rent amount not documentary-stamp taxable? The agreements provided for return of the unearned portion after specified early termination events, so it was not treated as consideration for a definite ownership interest.

Q: Would exercising the fixed purchase option be tax-free? No. The TAA said option consideration would be subject to documentary stamp tax if exercised.

Q: Did DOR finally decide the property-tax exemption? No. It said the property appeared exempt on public-purpose facts but left the binding classification to the county property appraiser.

Citations and references

• Fla. Stat. §§ 212.031(1)(c), (2)(b), 212.06, 212.08(6) — real-property lease tax, anti-pyramiding, dealer registration, and government exemption
• Fla. Admin. Code rr. 12A-1.038, 12A-1.070(9) — resale certificates where substantially all leased property is subleased
• Fla. Stat. §§ 201.02(1), 201.08 — documentary stamp tax on real-property consideration and obligations
• Fla. Stat. §§ 196.012(6), 196.199(2) — public-purpose use and governmental property
• Fla. Stat. § 213.22 — Technical Assistance Advisements

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 98A-042

Original ruling text

SUMMARY

No sales tax, intangible tax, nor documentary stamp tax is
imposed on any portion of a transaction whereby a
governmental unit leases its land and improvements to an
investor, who then pays to the governmental unit an advance
lease payment for the entire term of the lease, a part of
which is retained by the governmental unit and the
retaining portion of the advance lease payment is then used
by a separate entity to pay the sublease payment required
of a trust created by the governmental unit who subleases
the land and improvements from the investor which land and
improvements are then sub-subleased back to the
governmental unit.

Jun 02, 1998

Re: Technical Assistance Advisement 98A-042
Real Property Lease-Leaseback
Sections 196.012(6), 196.199(2), 201.02, 201.08,
212.031(1)(c), and (2)(b), 212.06, 212.08(6),
Rules 12A-1.038, 12A-1.070, F.A.C.
XXX (herein County, or alternatively Head Lessor, or Subsublessee)
XXX, and XXX (collectively Facility)
XXX (herein Trust, or alternatively, Head Lessee or
Sublessor)
XXX (herein Equity Investor)
XXX (herein Sublessee or Sub-sublessor)
XXX (herein Lender)

Dear :

This is a response, styled a Technical Assistance Advisement, to
your letter dated February 27, 1998, and the letter dated May
14, 1998, wherein it is asked whether a proposed transaction in
certain real property, identified as Facility, is subject to
state taxes including sales or use tax, documentary stamp tax,

and intangible tax, when County, as the owner of Facility, seeks
to lease Facility to Trust, which then will simultaneously
sublease Facility to Sublessee, which, in turn, will subsublease Facility back to County. The Facility will be leased
by County to Trust pursuant to a lease styled Head Lease, the
term of which is to be approximately 36 1/2 years. Trust, as
described in the Trust Agreement, Article II, Section 2.01 is a
business trust organized under the laws of Delaware and in
section 3.01 the trustee of Trust is authorized to, among other
grants of authority, pay the initial rent payment to County
pursuant to the Head Lease and to sublease Facility to
Sublessee.

The Trust will sublease Facility to Sublessee for an initial
term (herein Basic Term ), as described in section 3 of the
agreement identified hereafter as Sublease, of approximately 14
years. Sublessee, as described in the Participation Agreement is
a Florida business trust, the sole beneficiary of which is
County. The Sublease may be extended (herein Sublease Renewal
Term) for approximately 15 years if so elected by the Sublessor
under the Sublessee Renewal Option, as provided in Section
14(b)(i) of the Sublease, or may be deemed to have made the
election to extend as allowed under Section 14(c), 14(d)(ii)C,
14((iii)(B) when all the requirements of Section 14(d)(i) have
been met.

Sublessee will sub-sublease Facility to County, for an initial
term of approximately 14 years in accordance with a document
identified hereafter as the Sub-sublease, which term may be
extended for an approximate 15 years period on a date styled the
Basic Term Expiration Date. The Sub-sublease will have
essentially the same terms and conditions as those of the
Sublease between Trust and Sublessee. Note is made that the
amount of the rent paid by Sublessee to Trust will be slightly
less than the amount paid by County to Sublessee, as revealed on
the single sheet on which columnar comparisons are depicted of
the rent payments to be made pursuant to both the Head Lease and
the Sublease.

Attached to both letters were copies of the relevant agreements
between the parties, including other supplemental information.

Relationship of the parties

Trust, a Delaware business trust, is to receive the principal
benefits from this transaction. It is to be formed by Equity
Investor, which will be beneficial owner of Trust.

Sublessee, a trust created under Chapter 609, F.S., is to be
formed and capitalized by County. The sole beneficiary of
Sublessee is County. In accordance with Section 14 of the Subsublease
"... the Sub-sublessee shall have the option... to purchase from
the Sub-sublessor at the end of the Sub-sublease Basic Term
Expiration Date the Head Lease Rights and Obligations with
respect to all (but not less than all) of the Facility...." In
the event that the Purchase Option is exercised by Sub-sublessee
the Sub-sublessor, as provided in Section 14(a) of the Subsublease,
"... shall exercise and perform its corresponding option under
Section 14(a) of the Sublease."

This right is identified in Section 14 of the Sublease as the
Purchase Option.

This option, if exercised by the trustee of Sublessee, will
extinguish all agreements because, in such an event, in
accordance with Section 12A of the Participation Agreement "...
the Sublessee, the Sublessor, the Equity Investor and the Lender
shall... effect a merger of the Sublessor into the
Sublessee...." Section 12A further states that the merger shall
be a statutory merger in which "... the Sublessee shall be the
surviving entity and shall assume all of the obligations of the
Sublessor..."

In all such events after the Purchase Option is exercised by
Sub-sublessee and the subsequent merger of County and Sublessee,
the County would be, simultaneously, the head lessor, head
lessee, and sublessee. If the Purchase Option is not exercised
by County then you cite the following elections available to
County:

(i) permit the Sublease to expire, in which case the Trust,
as Head Lessee under the Head Lease Term, will retain (for
itself or its assigns) possession of the properties for the
remainder of the Head Lease Term; or (ii) cause the Sublessee to
continue the Sublease for the Sublease Renewal Term, in which
event the Sublessee will be obligated to extend annual rental
payments thereunder... for the balance of the Sublease Term ,
without any further options to purchase the Trust's rights under
the Head Lease.

County is a Florida county which owns, in fee, the land and
improvements of Facility.

Payments to be made by the parties

Trust, at the closing of this transaction, will make one
payment, in the sum of approximately $65,000,000 to County,
pursuant to the Head Lease, as a prepayment of rent. This
payment is designated in the Head Lease in Section 3(b) as
Advance Rent Payment. This amount, as you state, is "...
approximately 60% to 90% of the fair market price..." of
Facility. Trust will derive about 80 percent of the rent
prepayment amount from a nonrecourse loan extended to it by
Lender. Equity Investor will provide, itself, the remaining 20
percent of the Advance rent Payment. At the anniversary date of
the fifth year after the termination of the Head Lease, which
date is January 3, 2040, Trust will also make what is described
in the Head Lease as a Deferred Rent Payment, in an amount of
approximately $710,000,000 to County, in the event that the
Purchase Option is not exercised by both Sub-sublessee and
Sublessee.

You provide the information that the loan made by lender will be
executed and delivered outside Florida and that the loan will
not be secured by any Florida real property. Lender is not
incorporated or domiciled in Florida.

County will retain for its own use approximately $4,000,000 as
compensation for its participation in this transaction. The
remaining sum, less expenses, of approximately $60,300,000 will
be used to capitalize Sublessee.

Sublessee will pay part of this capitalization, in the sum of
approximately $50,300,000, pursuant to an agreement styled
Payment Undertaking Agreement (herein PUA), to an entity
identified in the PUA as Payment Undertaker, an affiliate of
Lender, which will under the PUA have the duty to tender rental
payments required of Sublessee to Trust in an amount equal to
the debt service on the loan. The amount of this portion of its
capitalization will equal whatever is the balance of the
principal of the loan made by Lender to Equity Investor.

The remaining portion of the capitalization of Sublessee, in an
amount of approximately $10,000,000, will be invested in what is
described as a Guaranteed Investment Contract ( herein GIC) the
provider of which is also an affiliate of Lender. The
investment will accrue, at the end of the Initial Sublease Term
which is approximately 17.5 years, to an amount which will equal
the Fixed Purchase Price if such option is exercised by County.
The affiliate of Lender, which issues the GIC (herein GIC
Provider), is not to be incorporated or domiciled in Florida.

Sublessee will also grant a security interest in the PUA and the
GIC to Trust to secure Sublessee's obligation under the
Sublease; Trust will further assign such security to Lender to
secure the non-recourse loan agreement. If the Purchase Option
is not elected by Trust, then this investment will be returned
to County provided the County has at that time provided what you
describe as "... alternative collateral in the event the
Sublease is extended."

The surety bond issued to Trust ensures that the full equity
termination value is available to Trust in the event of an early
termination of this transaction.

Should the Head Lease be terminated before its term, then the
Equity Investor would receive a refund of the applicable portion
of the prepaid rent. The early termination could be occasioned,
as you enumerate, by a default by County under the Head Lease;
by a default of the County under the Sub-Sublease, or default by
Sublessee under the Sublease; by legislation or decision by a
governmental body that caused participation of the County in

this transaction is to be terminated; or, by as you state, "...
a casualty event rendering the Properties unusable...."

The Department especially notes that the operation of Facility
by County prior to and during this transaction will continue
undisturbed, and the title to Facility with the exception of the
leased land, as explained above, will remain in County.
Further, neither the Lender, Payment Undertaker, nor the GIC
Provider will be incorporated or domiciled in Florida.

As to these facts you argue that no sales or use tax may be
imposed on any of the payments required to be made by any of the
parties because a resale certificate may be issued by Owner
Trust to County in accordance with the Head Lease. Owner Trust,
will in turn, receive a resale certificate from Sublessee,
pursuant to the Sublease. The money paid to Sublessee by County
required by the Sub-Sublease is exempt because County is a
governmental body enumerated in s. 212.08(6), Florida Statutes.

With respect to documentary stamp tax you assert that all of the
rent payments required by the Head Lease, Sublease and SubSublease are only promises to pay rent which are not subject to
documentary stamp tax. The provisions for the return of any
unearned prepaid rent defeats an argument that the lessees are
purchasing an interest in real property. You also argue that
statutory merger of Sublessee and Owner Trust which will occur
concurrently with the excise of the Fixed Purchase Option by
citing that the excise of the Fixed Purchase Option will
concurrently result in a statutory merger of Sublessee and Owner
Trust as a statutory merger. You add that since the loan will be
made, executed and delivered outside of Florida and will not be
secured by any real property in Florida, no documentary stamp
tax is applicable.

As to intangible tax, you assert that the GIC and the PUA are
exempt from intangible tax because both are in the nature of a
cash deposit or a purchased annuity. You also state that
Properties will continue to be operated for a public purpose by
County.

Department Response

Sales Tax - Department Response

Florida sales tax, as you posit, may not be imposed on any
payment made pursuant to the planned Head Lease, Sublease, or
the Sub-sublease, as these agreements have been described in
your letter dated February 27, 1998, in the letter dated May 14,
1998, and as provided in the documents which were attached to
both communications. You provided the Department with the
following documents: Head Lease Agreement, Sublease Agreement,
Sub-Sublease Agreement, Participation Agreement, Trust
Agreement, and a document providing definitions and rules of
usage of the terms found in all of the above cited documents.

As to the Sub-Sublease, s. 212.08(6), F.S., exempts from the tax
any payments made by certain enumerated governmental entities,
including a county of the state, when pursuant to a sale such
payment is made directly to the selling dealer. The
administrative rule which interprets the statute is Rule 12A1.001(9)(a), Florida Administrative Code.

Considering the instant facts, the payments pursuant to the SubSublease are to be made directly by County, the Sub-Sublessee,
to the Sub-Sublessor. As a consequence, these payments in
consideration of the lease of real property, are exempt under s.
212.08(6), Florida Statutes.

As to the Head Lease, and the Sublease of Facility, s.
212.031(1)(c), F.S., imposes sales tax on the total rent or
license fee given for the right to use or occupy real property.
Rule 12A-1.070, F.A.C., interprets s. 212.031, F.S., and in
subsection (9) of the administrative rule a provision allows the
tender of a resale certificate by a subtenant or assignee in the
instance of a lessee which sublets or assigns all of the real
property, or when such lessee retains only an incidental portion
of the real property under sublease or assignment.

Although the statutes do not contemplate the application of sale
for resale concepts to the lease and re-lease of real property,
the statutes do prohibit the pyramiding of taxes upon the same
transaction. See Section 212.031(2)(b), F.S. Thus, for

example, a lease of real property from January 1, 1997, to
January 31, 1997, and a re-lease of that same property for the
same period of time should not result in tax on both the
original lease and the re-lease. Thus, for administrative
convenience and to ensure that the pyramiding does not occur,
the rules provide for the use of resale certificates in lease
transactions involving real property under certain very limited
circumstances.

Rule 12A-1.038(1), F.A.C., provides for the tender of a resale
certificate under conditions described in the rule. Rules 12A1.039(1), F.A.C., and 12A-1.070(9), F.A.C., identify the sublease of real property as an appropriate use of a resale
certificate only where substantially all of the property is released. The rules provide that retention of an incidental
portion of the property will not prevent the sub-lease from
being viewed as a sub-lease of all of the leased property.
Thus, since the Head Lessee and the Sublessee will lease
Facility to, respectively, the Sublessee and the Sub-sublessee,
the Head Lessee and the Sublessee may each properly provide a
resale certificate to County when County is both the Head Lessor
and the Sub-sublessee. The Head Lessee and the Sublessee will be
thereby excused from collecting sales tax on their lease and
sublease of the Facility.

As indicated by the Department in an oral communication on March
31, 1998, s. 212.031(2)(b), F.S., bars both the pyramiding and
the decreasing of the tax as a result of a progression of real
property transactions. Considering the instant facts the average
annual payments under the Head Lease would be less than the
average annual payments required under either of the respective
subleases.

These amounts are depicted in a single page document arranged in
a columnar comparison which reveal that the Head Lease payments
total $66,958,166 compared to the Sub-sublease and Sublease
payments, which are in the same amounts, which total
$71,492.440. These amounts when reduced to average annual
amounts reveal that the average annual payment given pursuant to
the head Lease is $4,292,190 and that pursuant to the subleases
the average annual lease amount is $4,582,849. Thus, having

found that the payments required of the parties do not decrease
through this series of leases of Facility, the provisions of s.
212.031(2)(b), F.S., are not applicable.

Thus, no sales or use tax would be levied on the payments made
pursuant to the lease of Facility by County to Trust pursuant to
the Head Lease, nor would any such taxes be imposed on the
payments to the Trust by Sublessee pursuant to the Sublease if,
anterior to any of the transactions, both Trust and Sublessee
were registered Florida dealers as that term is defined in s.
212.06, F.S., and extended resale certificates to their
respective lessors. Trust would tender such certificate to
County, and Sublessee would extend the certificate to Trust.

Intangible Tax - Department Response

Under the provisions of the Head Lease, Section 6(a), the only
purpose allowed the Head Lessee is the sublease of the Facility.
The Sublease, in Section 6(a), provides the only use of the
Facility by the Sublessee is the sub-sublease of the Facility.
Consequently, only the Sub-sublessee (which is the County) may
operate the Facilities, and that such operation is in
furtherance of a governmental or public purpose. Therefore, the
lease of the Facility to Trust would be exempt from intangible
tax on governmental leasehold estates. No intangible tax will
arise with respect to any of the intangible property acquired
by, or arising out of, this transaction so long as the
ownership, management and control is outside of the State of
Florida.

Documentary Stamp Tax - Department Response

The prepaid rent under the Head Lease will not be subject to
documentary stamp tax under s. 201.02(1), F.S., since this
transaction provides that the unearned portion of the prepaid
rent must be refunded to the Head Lessee. The Head Lease may
terminate for one of three events: the loss of the Facility as
expressed in Sublease Section 9(a); the occurrence of any of the
Burdensome Events as provided in Sublease Section 14(e), and as
that term is defined in a document which defines the terms and
rules of this transaction; and, for what is styled as Events of

Default in Sublease Section 16 and as these default provisions
are further explained in Section 16(d) of the Sublease.

In these provisions, the terms Stipulated Loss Value, and
Termination Value appear, and each decreases equally over the
course of the term of the agreement. At any time during the
term of the agreement the remaining portion of the Advance Rent
Payment, if it were amortized over the term of the agreement,
would equal the Stipulated Loss Value or the Termination Value.
Thus, this transaction contains an adequate provision for the
return of any unearned portion of the Advance Rent Payment.
Therefore, it can be construed that the lessees are not
purchasing an interest in real property for a definite period of
time, since it is conditioned upon a future event. None of the
lease transactions are subject to the documentary stamp under s.
201.08, F.S.

Any consideration paid for the Purchase Option would be subject
to documentary stamp tax under s. 201.02(1), F.S., if the option
is exercised. Consideration paid in connection with the
Sublessor Merger, as that term is defined in the Participation
Agreement Section 12A, would not be subject to documentary stamp
tax.

Ad Valorem Tax - Department Response

The elected county property appraiser has the authority and
responsibility for classifying property as taxable or exempt for
ad valorem property taxation purposes. Where the County leases
Facility to a nongovernmental lessee but retains title to the
property, such property would appear to be exempt from ad
valorem taxation as long as the property is used for a "public
purpose." See Sections 196.199(2) and 196.012, Florida Statutes.
The leasehold interest would be subject to ad valorem property
taxation unless the county-owned Facility is used for a "public
purpose" as defined in s. 196.012(6), Florida Statutes.
Therefore, after a review of the documents presented to the
Department, the Facility would not appear to be subject to ad
valorem property taxation.

The 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. The technical opinion as to ad
valorem property taxation is not binding on the Department as
the implementation of this tax is in the province of the office
of the county property appraiser.

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

Sincerely,

Robert G. Parsons
Tax Law Specialist
Technical Assistance and
Dispute Resolution

Joe Parramore
Tax Law Specialist
Technical Assistance and
Dispute Resolution

Joy Eldred
Tax Law Specialist
Documentary Stamp Tax
Technical Assistance and
Dispute Resolution

John Felton
Tax Law Specialist
Ad Valorem Tax
Technical Assistance and
Dispute Resolution

Ctrl. No. 33264