Florida tax loophole saves big landlords millions

This story originally appeared in the Palm Beach Post on Aug. 12, 2007. When they unanimously closed the tax loophole in 2009, state lawmakers cited the Post’s coverage.

At a time when values of offices and resorts are soaring, a few prime properties in South Florida are changing hands for $10.

Phillips Point in West Palm Beach, PGA National Resort & Spa in Palm Beach Gardens, Fort Lauderdale’s Las Olas Centre — all are officially recorded as selling for $10 in recent months.

In truth, these trophy properties fetched $200 million, $170 million and $230.9 million, respectively.

So why the tiny sale prices in public records? Taxes.

Because of a legal loophole, sellers can avoid paying a state tax — the documentary stamp fee collected on real estate deals — by arranging transactions as transfers of assets in a corporation rather than as sales of real property. The result: The three big sales generated only 70 cents each.

If the trophy properties had been recorded at full price, the $600 million in sales would have generated $4.2 million in documentary stamp taxes. It would take 1,500 sales of homes priced at $400,000 to funnel the same amount into state coffers.

In a unanimous ruling in 2005, the Florida Supreme Court called the practice of avoiding documentary stamp taxes legitimate, so long as the deals meet a few legal tests. But with state and municipal governments facing a budget squeeze, critics say lawmakers should close the loophole.

“This tactic is becoming more and more common and is costing the state millions annually in lost revenue,” said Palm Beach County Property Appraiser Gary Nikolits, who’s also president of the Florida Association of Property Appraisers.

State Rep. Susan Bucher, D-West Palm Beach, said the maneuver, while legal, skirts the spirit of the law and shortchanges the state’s affordable housing program.

“It’s a no-brainer. This is a monster loophole that we really need to address,” Bucher said. “Since we’re headed to a special session this month to cut $1 billion, we need the money.”

Florida collected $3.1 billion in documentary stamp taxes in 2006-07, with proceeds divided among state programs, including affordable housing and conservation.

No one knows how much the loophole costs the state. Neither the Florida Department of Revenue nor county property appraisers calculate taxes lost in this manner because the numbers are difficult to track. In some cases, no deed is filed when a property changes hands. In others, buyers and sellers refuse to divulge sale prices.

Yet even as the stakes for this practice rise, there’s little interest in Tallahassee in closing the loophole, Nikolits and other property appraisers said. They hope the big savings enjoyed on high-profile sales will spur lawmakers to action.

In a news release last month, Las Olas Centre seller Colonial Properties Trust (NYSE: CLP) of Birmingham, Ala., crowed that the deal “represents one of the highest Class A office sales per square foot in the history of the Southeast United States.” If structured as a typical sale, the $230.9 million deal would have yielded about $1.6 million in documentary stamp taxes.

“What they’re doing makes perfect sense, given the Supreme Court ruling,” said Ron Gunzberger, general counsel for the Broward County Property Appraiser. “Maybe a sale like this would be the impetus for the legislators to close this loophole.”

The documentary stamp tax is collected at a rate of 0.7 percent of the value of a deal, so it’s clear why sellers of pricey properties want to avoid the tax. But if you’re selling a $300,000 home, don’t bother: You probably would spend more in legal fees than the $2,100 you’d save from setting up a sale as a transfer of corporate assets, and residential mortgage lenders and title insurers likely would balk at such an arrangement.

“This is not an opportunity that your average homeowner can take advantage of,” said Adi Rappoport, a real estate attorney at Gunster, Yoakley & Stewart in West Palm Beach. “How much money do you want to save? If it’s a couple thousand dollars, it’s not worth it.”

Rappoport said the Florida Supreme Court’s 2005 ruling opened the way for more $10 transactions. In that decision, justices ruled that Crescent Real Estate Equities, a Fort Worth, Texas, real estate investment trust, didn’t owe documentary stamp fees when it transferred ownership of its Miami Center office tower to another entity it controlled. Justices agreed with Crescent’s argument that the transfer wasn’t a sale, and Crescent still owns the building.

Since the ruling, $10 transactions have become increasingly common, even though they require a paper shuffle to satisfy the requirements of the decision. Among the hurdles: There can be no mortgage on the property, and ownership must not change.

In the sales of Las Olas Centre, PGA National and Phillips Point, ownership clearly changed, raising the question of whether the Supreme Court really meant to waive the documentary stamp tax.

The loophole also raises questions of fairness. Deep-pocketed sellers avoid a tax that everyday home sellers must pay.

But attorneys who advise investors on these deals say the precedent is clear.

“The fact of the matter is the Supreme Court says this is not a taxable transaction,” Rappoport said. “More and more people are aware of the potential savings.”

Notably, the deed on the Las Olas Centre sale specifically mentioned the Supreme Court decision.

“No Florida documentary stamp tax is due and payable in connection with this deed pursuant to the Crescent ruling,” the document said.

The deed that transferred ownership of the PGA National Resort from developer E. Llwyd Ecclestone to Chicago hedge fund Walton Street Capital in August 2006 likewise cited the ruling. (Ecclestone since has reinvested his proceeds in a portfolio of hotels throughout the country.) So did last month’s deed that turned Phillips Point over to New York investment group Colonnade Properties.

Some, such as Miami real estate attorney John Sumberg, defend the practice of avoiding documentary stamp taxes. He sees a trade-off: The arrangement cuts taxes but increases the potential legal risk to the buyer. Buying the company instead of just the real estate makes it more likely that a buyer will face a lawsuit based on something that happened before the buyer bought the property.

“People try to minimize taxes legally all the time,” Sumberg said. “If they can structure something and avoid a tax without taking on a liability, of course they’ll do that.”

Not every buyer wants to accept legal liability, Sumberg said, so the practice remains somewhat rare.

Many big-money deals still generate documentary stamp taxes. For instance, the $162 million sale of 537 acres at Palm Beach Park of Commerce in May was recorded at full price. Documentary stamp taxes totaled more than $1.1 million on that sale.

Jeremy Shapiro of First Industrial Realty Trust, which bought the Palm Beach Park of Commerce land, said the $10 transactions aren’t especially common because buyers are afraid of lawsuits.

“You never know what the liability is,” Shapiro said.

The rise in documentary stamp tax avoidance comes at a time when this revenue stream is shrinking. During the real estate boom, documentary stamp fees soared from $2 billion in fiscal 2002-03 to $4.1 billion in 2005-06 before falling to $3.1 billion in 2006-07 as real estate sales slowed.

Still, the documentary stamp tax loophole hasn’t been a priority for lawmakers.

At a hearing of the Florida Taxation and Budget Reform Commission in May, Alan Johansen, staff director of the Senate Finance and Tax Committee, briefly called legislators’ attention to the tax-saving tactic.

“It’s a pretty glaring opportunity for some taxpayers,” he said at the time. “So far it does not appear to be widespread, but we’re watching it.”

According to a transcript of the meeting, members of the commission asked him no follow-up questions about the issue. Johansen’s comments came two months before the sales of Las Olas Centre and Phillips Point.

Florida TaxWatch, a Tallahassee research group that often issues opinions on property taxes and sale taxes, has taken little interest in this loophole.

“We haven’t really looked into that,” said Florida TaxWatch’s Kurt Wenner.

Few have. State Sen. Dave Aronberg, D-Greenacres, and Rep. Carl Domino, R-Jupiter, both said last week that they don’t know enough about the issue to venture an opinion, and Bucher said she had no idea about the three big deals that avoided $4.2 million in taxes until she was told about them by a reporter.

“I didn’t realize it was such a resounding amount,” she said last week.

A spokesman for Gov. Charlie Crist offered little comment about the loophole except to say, “We’re reviewing it.”

The 2005 Supreme Court ruling noted that lawmakers can end the practice, and Bucher said lawmakers should do just that.

“It is a loophole that needs to be closed, because they’re skirting the law,” Bucher said. “The public’s heart doesn’t bleed for these big corporations.”

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