TAA 21A-018 Real Property Rental
QUESTION: Does Taxpayer’s sale and subsequent lease back of a gas station constitute a mortgage?
ANSWER: No. Taxpayer’s sale and subsequent lease back of the gas station does not constitute a mortgage. Taxpayer has entered a true lease with Buyer/Lessor.
November 12, 2021
Technical Assistance Advisement No. 21A-018
Sales and Use Tax – Rentals, Leases – Real Property
XXXXX (“Taxpayer”) (“Petitioner”)
FEI No.: XXXXX
BPN: XXXXX
Sections 212.031(1)(a), 213.22(1), and 697.01, Florida Statutes (“F.S.”)
Rules 12A-1.070(1)(a), and 12A-1.071(1)(d), Florida Administrative Code (“F.A.C.”)
XXXXX (“Buyer/Lessor”)
FEI No. XXXXX
BPN: XXXXX
Dear XXXXX:
This letter is a response to your petition dated March 11, 2021, for the Florida Department of Revenue’s (the “Department’s”) issuance of a Technical Assistance Advisement ("TAA") with regard to whether sales tax is due on payments your corporation is making to lease real property which it originally sold to the Lessor. Your petition has been carefully examined and the Department finds it to be in compliance with the requisite criteria set forth in Chapter 12-11, Florida Administrative Code. This response to your request constitutes a TAA and is issued to you under the authority of section 213.22, F.S.
Requested Advisement
Whether Taxpayer’s sale and subsequent lease back of a gas station constitutes a mortgage.
Facts As Provided
On February 11, 2020, Petitioner, Taxpayer, XXXXX, purchased a gas station located at XXXXX, Florida from XXXXX (“Initial Property Seller”) for what appears to be $1,520,000. 1* This property is one of XXXXX properties Taxpayer purchased from Initial Property Seller.
On February 12, 2020, Taxpayer sold the gas station property in XXXXX to XXXXX (“Buyer/Lessor”) for $2,015,200.2*
Buyer/Lessor entered into a Real Property Lease (“Lease”) with Taxpayer on the same day and leased the property to Taxpayer for a term of 21 years.
- The initial annual base rent was $161,213.00 and this amount increased by 2% each year. Taxpayer had two options to renew for a period of 10 years each.
- Taxpayer leased the property in its “As-Is” “Where-Is” condition.
- Tenant was responsible for making the premises suitable for its use.
- The Lease was an absolute triple net lease, such that, in addition to paying base rent, Taxpayer was responsible for paying for all repairs, maintenance, upkeep of the appearance of the premises, taxes, insurance, utilities, etc.
- Some of the insurance Taxpayer had to obtain included a policy for bodily injury and property damage arising out of the ownership, use, occupancy, or maintenance of the premises in the amount of $2,000,000, which insured Taxpayer and listed Buyer/Lessor and Buyer/Lessor’s lender as additional insureds. Taxpayer also had to obtain insurance covering loss or damage to the premises for reasons such as fire, wind, flood, and earthquake in an amount equal to the full replacement cost of the building. In the event of casualty, Taxpayer would be able to use the entire insurance proceeds payable to it to repair or reconstruct the building and, if the event occurred in the last year of the initial term or of the renewal term, Taxpayer could terminate the lease.
- In the event Taxpayer defaulted by failing to pay any monetary obligation under the Lease, breaching another obligation under the Lease or filing for bankruptcy, Buyer/Lessor could sue for damages, evict Taxpayer, or avail itself of other remedies.
- Taxpayer was given a one-time right to terminate the Lease in the event that a condemnation of the property resulted in its being unable to continue to use the premises, but it appears that it would not be relieved from its obligations to pay rent to Buyer/Lessor under any other circumstances. See Real Property Lease, Sections 6.4 and 15.2.
Three Guaranties were executed, in which the Guarantors, all affiliates of Taxpayer and one of whom was Taxpayer’s Managing Member (XXXXX), guaranteed the payment and performance of all of Taxpayer’s covenants, obligations, liabilities and duties under the Lease. Taxpayer and XXXXX (“XXXXX”), Buyer/Lessor’s controlling company, entered into an agreement on February 12, 2020, in which Taxpayer was granted a limited right to purchase the XXXXX gas station property during the first six months of the Lease term for the amount of the initial base rent divided by 6.4%, or $2,518,953.13. The COVID-19 pandemic began in March, 2020, which affected the business environment, and this prevented Taxpayer from repurchasing and refinancing the property before the option to repurchase expired. Taxpayer states that the option to repurchase would only be extended until “January 2020.”3* Taxpayer was not able to repurchase the property before the extended option period expired. It should be noted that there is no provision in the Lease for Taxpayer’s repurchase of the property. The Lease states that, if Taxpayer performs every provision in the Lease, it will only be entitled to its security deposit plus interest, or any balance remaining thereof, once it vacates the premises. In other words, possession of the property will return to Buyer/Lessor at the end of the lease term.
Buyer/Lessor currently assesses sales tax on the lease payments. Taxpayer believes the sales tax is unjustified because it believes the transaction should be considered a financing arrangement/mortgage, which would make it exempt from sales tax. Buyer/Lessor does not agree with Taxpayer’s position regarding the sales tax since the option to repurchase has expired. However, Buyer/Lessor would prefer to stop collecting sales tax if there were a legal way to do so. Taxpayer asks the Department to make a determination regarding whether Taxpayer’s payments to Buyer/Lessor are exempt from sales tax.
Taxpayer’s Argument
Taxpayer asserts that this transaction, which it refers to as a “sale-leaseback” transaction, should be exempt based on the points established in the Department’s Technical Assistance Advisement TAA 04M002 (Nov. 16, 2004) (“TAA 04M-002”). 4* TAA 04M-002 set forth various factors, identified in law, which should be taken into consideration when determining whether a transaction is a lease or a mortgage. Taxpayer addresses each of these factors and discusses how it believes those factors apply to this transaction.
Point #1: “Recognizing the clear and unambiguous language of the relevant document while keeping in mind that substance is always preferred over form.”
In support of this point, Taxpayer lists documents it included with the request for advisement, which documents it states prove that the transaction should be regarded as a “financing arrangement/mortgage.”5* Taxpayer also states that, although the option to repurchase is outside the Lease, when the Lease is viewed collectively with the e-mails and the Option to Repurchase Letter, this establishes that Taxpayer had an option to repurchase and that the transaction was a “financing arrangement.”
Point #2: “Recognizing that for there to be a mortgage, there must be a debt secured thereby.”
Taxpayer states that, in this “sale-leaseback” 6* arrangement, the debt is secured by the facility itself, Taxpayer, and Taxpayer’s Managing Member.7* Taxpayer states that the entire loan amount, $2,015,200, is the debt secured and that Buyer/Lessor has further mortgaged the property and submitted the lease and guarantee as part of the security. 8*
Point #3: “Examining if ‘rent’ is fixed to debt service, as opposed to the rental market value of the property.”
The agreement calls for the payment of “Base Rent.” When the net present value of the payment stream over 21 years (the term of the lease) is calculated, Taxpayer states that it provides for an 8% return on the investment by the Buyer/Lessor. In addition, the rent increases by 2% per year regardless of market conditions. Thus, Taxpayer contends, the rent structure has been designed to achieve a desired rate of return such as that required by a hedge fund or a capital investment firm, and it is not based on normal independent gas station capital rates or Florida Market Values. In addition, if this had been a normal lease, Taxpayer argues that it could have leased the property in an arms-length transaction for a third of the base rent listed in the Real Property Lease. Taxpayer provided a schedule which it states reflects the sales history of the property and how the Market Cap Rates help determine the monthly rental amounts.
Point #4: “Determining whether Buyer/Lessor is a single purpose financing corporation created prior to the transactions in order to facilitate the loan process.”
Taxpayer states that Buyer/Lessor was organized on XXXXX, XXXX, and that this was after Taxpayer and the principals of Buyer/Lessor had worked out the terms of this “sale-leaseback” arrangement. Taxpayer contends that Buyer/Lessor’s only purpose to date has been the ownership of the facility and the return of its capital. He states that the name of the entity itself, “XXXXX,” adds evidence of its narrow purpose, in that “XXX” stands for XXXXX (agent for Buyer/Lessor), “XXX” stands for XXXXX (Taxpayer, the Seller/Lessee), “XXXXX” stands for the location of the Facility involved, the number “XXX” represents the first transaction between the two parties located in this city, and “XX” represents where Buyer/Lessor is registered (i.e., XXXXX). Taxpayer states that Buyer/Lessor agrees that its entity is a Single Purpose Entity.9* Taxpayer adds that the “sale-leaseback” arrangement was completed within 147 days of Buyer/Lessor’s inception.
Point #5: “Examining whether the short-term and long-term risks pass to the ‘so-called buyer."
Taxpayer states that it pays all the insurance premiums and that it is responsible for all deductibles.10* It also pays for all of the facility repairs and maintenance. Taxpayer is also responsible for all of the utilities, all environmental matters, and all of the governmental requirements. Taxpayer is responsible for all Personal and Real Property taxes, as well. As stated above, possession is provided to Taxpayer on an “As Is” “Where-Is” condition. As a result, Taxpayer states that Buyer/Lessor is not responsible for any Tenant Improvements during the term of the arrangement. Taxpayer has released Buyer/Lessor from all liabilities Taxpayer incurs during Taxpayer’s use of the Facility.
In addition, Taxpayer is required to carry extensive insurance coverage, i.e., “All Risks,” as such term is used in the insurance industry, under an ISO Causes of Loss-Special Form Policy, which Taxpayer states is more coverage than would be required in a normal lease. In addition to other coverages, Taxpayer must insure the value of the land itself even though Taxpayer points out that the land would remain in any situation. Taxpayer states that, in general, it would be required to repair the premises in the event of a casualty loss and that it would be entitled to retain any amounts recovered in the event of a casualty loss or a condemnation of the property, as long as it did not reduce Buyer/Lessor’s recovery. Taxpayer also states that a casualty or a condemnation would not affect its obligation to make payments.11* When Taxpayer executed the lease, it immediately became the owner of the underground storage tanks, fuel dispensers and related piping that had existed on the property since the Initial Property Seller owned the property.12* Even though the title of such underground storage tanks, fuel dispensers and related piping had just been sold to Buyer/Lessor, the lease immediately divested Buyer/Lessor’s ownership of these items. Taxpayer states that the intent of this clause was to distance Buyer/Lessor from potential environmental issues that it would not be equipped or able to handle. Taxpayer contends that, if a “release” or other environmental issue were to occur, Buyer/Lessor would take the position of investor only and try to adopt the protections allotted to that of a bank or financier, which Taxpayer argues further proves that the transaction is a “financing arrangement.”
In addition, Taxpayer is required to periodically submit financial statements and tax returns.13*
Finally, the lease is personally guaranteed by Taxpayer’s Managing Member. As Guarantor, he absolutely, unconditionally, and irrevocably “guarantees the payment and performance of, and will pay and perform as a primary obligor, all of [Taxpayer’s] covenants, obligations, liabilities, and duties under the lease, as if [he] had executed the Lease as Tenant.”14* This liability extends to the fuel supply itself, as the property is deed restricted to the “XXXXX” brand. Taxpayer contends that it is clear that the risk of the facility has been transferred to Taxpayer.
Point #6: “Recognizing that the proper recording of a ‘debt’ requires the transfer of title shortly after the end of a ‘lease’ term.”
Taxpayer states that it never intended to complete the 21-year term under the lease agreement before getting the properties back into its name and states that the option to repurchase the properties existed outside the Lease document itself. It contends that the interest rate used by Buyer/Lessor is too onerous and expensive to maintain long term. Taxpayer had an opportunity to purchase these facilities from the Initial Property Seller and needed to secure financing quickly.
Although the term of the arrangement is for another 20 years, Taxpayer’s intent was to re-package this transaction with a different lender at a lower interest rate (i.e., 4% - 5% as opposed to 8%). Taxpayer states that COVID-19 has delayed the re-negotiations. However, it is currently working with several groups to complete the re-financing so that it can repurchase this facility and other facilities involved in similar transactions between Taxpayer and XXXXX’s SPE’s “with new Sale-Leaseback facilities with options to buy back the properties at substantial savings.”
Other Factors to Consider
In addition to the six factors discussed above, which Taxpayer took from TAA 04M-002, Taxpayer states that U.S. courts have a method to determine whether a transaction is a lease or a financing arrangement. Taxpayer states that they use an Economics Realities Test15* to establish the substance of the transaction rather than rely on the transactional form or the parties’ stated intentions. The common elements of this test, and their rationales, include:
1. Whether the seller-lessee has an option to repurchase the property and, if so, at what price. An option to repurchase the property, especially at a nominal price, leaves the entire residual value in the lessee, not the lessor, which may indicate a loan rather than a true sale-leaseback.16 Taxpayer had a purchase option for this property.17 However, because of COVID-19 and the shut-down, Taxpayer was not able to exercise this option before its expiration. (Note: even though the option to repurchase has expired recently, Taxpayer is proceeding with its re-financing of this facility.)
2. Whether the sales price for the property reflected its fair market value. If the property is worth substantially more than the purchase price, this might indicate that the property is serving as collateral for the recovery of the funds advanced and that the seller did not actually intend to part with ownership.18 In this situation, the sales price far exceeded the fair market value of the property. However, by using a capital group to finance the transaction as opposed to traditional lending, Taxpayer was able to achieve 100% financing on the value of the facility. Thus, Taxpayer contends that the facility is worth more than the initial $760,000 purchase price first negotiated with the Initial Property Seller as Taxpayer states that it had it refinanced for $2,015,200.19
3. Whether the rent under the lease reflects fair market rent for the property, as opposed to providing a particular rate of return to the purchaser-lessor.20 Taxpayer states that rent that is calculated to provide a return on the capital invested by the buyerlessor looks more like “interest” than rent and supposedly indicates a loan transaction. In this situation, Taxpayer contends that the rent has been absolute and that it is not tied to the local market in any fashion. Taxpayer contends that it is paying a rate of return on an investment which is at least 1% higher than what it could be paying if it had just decided to lease. There has also been no offered break due to the COVID-19 outbreak. In addition, Taxpayer contends that Buyer/Lessor would not be able to easily re-let the facility out for the current amount of rent that is being assessed, as the amount would be far more than the current market value of rent for any facility like it.
4. Whether the tenant can end the lease, and with it the obligation to pay rent, or whether the obligation to pay rent is absolute. An absolute obligation to make the payments despite the termination of the leasehold seemingly indicates an obligation to repay a debt rather than payment for the use of the property.21 Taxpayer and its Managing Member, as Guarantor, have an absolute obligation to repay the full amount of the lease.
5. Whether the lessor is responsible for the obligations “normally” required of a landlord, such as making repairs, purchasing insurance, and paying property taxes.22 “If not, then the transaction would seem to be a loan, rather than a lease.” As it applies to this situation, Taxpayer is responsible for all repairs, maintenance, improvements, insurance, taxes, and any other obligations that may arise.
6. Whether the lessor had purchased the property for the lessee’s use.23 If the lessor already owned the property, then the transaction looks more like a traditional lease, but if the lessor purchased the property specifically for this lessee to use, then it looks more like the lessor is financing the lessee’s acquisition of an asset. In this case, Buyer/Lessor purchased a gas station with a convenience store (which it is not in the business of operating). The gas station which is the subject of this TAA, along with other gas stations, was purchased by the Buyer/Lessor for Taxpayer, whose prime business is the operation of gas stations and convenience stores.
In light of the factors for consideration set forth in TAA 04M-002 and the U.S. Courts Economic Realities Test, Taxpayer believes it has shown that this agreement should be considered a “financing arrangement.” Taxpayer does not know of any ruling or court case that would be unfavorable to its position. Its option to repurchase the property favorably expired due to the chaotic investment market brought about by the COVID-19 emergency (which also prevented it from re-financing before the option’s expiration date). Taxpayer does not believe it should be penalized when its intent in this transaction has always been to keep this a short-term financing arrangement (i.e., a loan). In light of this, Taxpayer requests that its “so-called payments” not be assessed sales tax.24
Applicable Law and Discussion
Section 212.031(1)(a), F.S., provides, in relevant part:
[E]very person is exercising a taxable privilege who engages in the business of renting, leasing, letting, or granting a license for the use of any real property . . . .
The Department of Revenue and the Florida Division of Administrative Hearings also have recognized that, under certain circumstances, although a document may be structured as a lease, its true character may be more like a mortgage,25 in which case, the transaction would not be subject to sales tax under chapter 212, F.S.26 Bridgestone/Firestone, Inc. v. Dep’t of Revenue, DOAH Case No. 92-2483, 15 FALR 4874 (1993), is a case in which the issue was whether a real property lease in “form,” which was part of a sale/leaseback transaction between two entities, should be treated as a mortgage in “substance.” The Administrative Hearing Officer in Bridgestone/Firestone, Inc., opined:
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.
See DOAH Case No. 92-2483, ¶ 23, 15 FALR 4874 (1993).
In the instant case, there is a Real Property Lease and a separate document entitled Limited Right to Purchase, which entitled Taxpayer to repurchase the property within 6 months of XXXXX, XXXX, and which Right to Purchase was apparently later extended until XXXXX, XXXX.
Various factors have been identified as important when one is determining whether a transaction is a lease or a mortgage. First, the clear and unambiguous language of the relevant documents will be respected, while keeping in mind that substance is always preferred over form. See Emergency Assocs. of Tampa v. Sassano, 664 So. 2d 1000 (Fla. 2d DCA, 1995); Markell v. Hilbert, 140 Fla. 842, 192 So. 392 (Fla. 1939). Second, for there to be a mortgage, there must be a debt secured thereby. See Bank of Miami Beach v. Fid. and Cas. Co. of New York, 239 So. 2d 97 (Fla. 1970). Third, a mortgage may be found where the "rent" is fixed to debt service as opposed to the rental market value of the property. See Sun Oil Co. v. Comm’r of Internal Revenue, 562 F.2d 258 (3rd Cir. 1977). Fourth, where the buyer/lessor is a single purpose financing corporation and its creation was for the purpose of facilitating a single financing transaction, the transaction is more likely to be regarded as a mortgage. See Bridgestone/Firestone, Inc., DOAH Case No. 92-2483, ¶ 26-28, 15 FALR 4874 (1993). Fifth, if all the short- and long-term risks and benefits of ownership pass to the Lessee, this is more indicative of a mortgage type transaction. See Bridgestone/Firestone, Inc., DOAH Case No. 92-2483, ¶ 27-28, 15 FALR 4874 (1993). Sixth, the proper recording of a "debt" requires the transfer of title shortly after the end of a lease term. See Bridgestone/Firestone, Inc., DOAH Case No. 92-2483, 15 FALR 4874 (1993). In addition, the Florida Supreme Court has opined:
In order to convert a deed, absolute in its terms, into a mortgage, it is necessary that the understanding and intention of both parties to that effect should be concurrent and the same.
See Holmberg v. Hardee, 90 Fla. 787, 803, 108 So. 211 (1925).
Let us look at these points one by one.
1. The language of the Lease Agreement and other relevant documents.
With regard to the documents involved in the transactions, Taxpayer conveyed all of its rights, title and interest in a Special Warranty Deed to Buyer/Lessor on or about XXXXX, XXXX. The language in the Real Property Lease executed between the parties on XXXXX, XXXX, is that of a true lease, and Taxpayer is to surrender the Premises, with the improvements thereon, to Buyer/Lessor at the expiration of the lease term. There are no terms in the Lease by which Taxpayer can purchase the property. There is language in a Limited Right to Purchase that states that Taxpayer could repurchase the property for an amount in excess of that which it sold it for within 6 months of the date of the lease (which date was apparently extended to XXXXX, XXXX), but Taxpayer did not avail itself of that option.27 Therefore, no such option to purchase the property exists at this time. XXXXX’s President also agrees that Taxpayer has no option to repurchase the property at this time.
2. The existence of a debt or other obligation.
In order for there to be a mortgage, there must be a debt secured thereby. See Bank of Miami Beach, 239 So. 2d at 100. Taxpayer contends that there is a debt, but the debt it speaks of appears to be its debt to repay the lease, which it states is secured by itself and its Managing Member. Taxpayer states that the debt is also secured by the facility, but Taxpayer has no interest in the facility. Taxpayer refers to the price it received for the property from Buyer/Lessor, $XXXXX, as the debt secured and states that Buyer/Lessor has further mortgaged the property and submitted the lease and guarantee as part of the security. Buyer/Lessor agrees that the assets and lease secure the mortgage which, by “mortgage,” it presumably means “its” mortgage. Taxpayer’s belief that this transaction is the equivalent of a mortgage and that it has an indebtedness which this “mortgage” is designed to secure appears to be misplaced. This will be discussed further below.
3. Nature of the "Basic Rent.”
Transactions have been found to constitute mortgages rather than leases when the amount of money the lessee pays for “rent” is directly related to the loan amount (debt service) rather than to a sum that is representative of fair market rent. See Sun Oil Co. v. Comm’r of Internal Revenue, 562 F.2d 258 (3rd Cir. 1977). Taxpayer contends that it is paying a rate of return like that on an “investment,” which is at least 1% higher than what it could be paying if it had just decided to enter into a normal lease. XXXXX’s President states that the rate of return is not fixed to debt service but to a rate of return on their capital. He also believes the rental amount reflects a fair market rental rate. On this matter, the parties are not in agreement and, in order for a deed, absolute in its terms, to be turned into a mortgage, there must be a consensus of the parties. See Holmberg, 90 Fla. at 803.
4. The purpose of the Landlord.
Where the buyer/lessor is a single purpose financing corporation and its creation is for the purpose of facilitating a single financing transaction, the transaction is more likely to be regarded as a mortgage. See Bridgestone/Firestone, Inc., DOAH Case No. 92-2483, ¶¶ 26-28, 15 FALR 4874 (1993). In Bridgestone/Firestone, Inc., the sole purpose of the buyer/lessor, FIRELCO, was to facilitate the issuance of commercial paper, which was a necessary part of the financing in the transaction. DOAH Case No. 92- 2483, ¶ 27, 15 FALR 4874 (1993). FIRELCO was also prohibited from engaging in any other business or corporate activity. Id. Such factors led the Hearing Officer to find that FIRELCO was a single purpose financing corporation created for the transaction. Id.
In the instant case, however, while it is possible that Buyer/Lessor was created for this transaction, the President of Buyer/Lessor’s controlling company states that Buyer/Lessor did not purchase this gas station for Taxpayer’s use and that it does not intend to keep this property, or the other gas stations involved in these transactions, long-term. He has made it clear that they intend to sell this property and, should the property sell, Buyer/Lessor will likely be the entity that conveys the property. Therefore, it cannot be said that Buyer/Lessor was created for the sole purpose of facilitating a single financing transaction between itself and Taxpayer and, even if this might have been the case initially, it does not appear to be the case now.
5. Short-Term and Long-Term Risks and Benefits.
If the short-term and long-term risks and benefits that would normally be associated with ownership pass to the lessee, this could indicate that the tenant is the true owner of the property and that the landlord is a single purpose entity established for lending purposes. Taxpayer is responsible for some things that a landlord would typically be responsible for. XXXXX’s President states that this is typical in leases like this, and Taxpayer admits that this factor may have lost some of its relevance in light of the recent popularity of triple net leases, such as these. 28 There is no particular indication that Taxpayer is receiving short- or long-term benefits from the property, however. In that the property will return to Buyer/Lessor at the completion of the lease term, Taxpayer will not benefit from any improvements it may have made to the property. It is true that Taxpayer will be responsible for repairing and/or replacing the property in the event of a casualty. However, Taxpayer will also be carrying insurance with limits that cover the full value of the property and will be able to utilize all the proceeds in the event of a casualty. Furthermore, if the casualty occurs in the last year of the initial term or of a renewal term, Taxpayer can terminate the lease. Contrary to Taxpayer’s statements, Taxpayer would not owe anything additional in the event of such termination according to the Real Property Lease. Therefore, Buyer/Lessor would retain some risks of ownership. Similarly, in the event of condemnation of the property, if such condemnation affected Taxpayer’s use of the premises to the extent that it could no longer use them, Taxpayer would have a onetime right to terminate the lease. This potential for loss remains with Buyer/Lessor. At the end of the lease, the property, with Taxpayer’s improvements, if any, revert to Buyer/Lessor and Taxpayer has nothing. This benefit of ownership remains with Buyer/Lessor. By contrast, in Bridgestone/Firestone, Inc., FIRELCO did not enjoy any of the long- or short-term benefits associated with ownership of property, and the risks associated with ownership of the property passed to the tenant. DOAH Case No. 92-2483, ¶ 27, 15 FALR 4874 (1993). The lease agreement was determined to be a mortgage in Bridgestone, Firestone, Inc. DOAH Case No. 92-2483, 15 FALR 4874 (1993). While some risks are transferred to Taxpayer in the instant case, none of the benefits appear to be and Buyer/Lessor specified risks, as well. Buyer/Lessor also gets the ultimate benefit of retaining the land, with improvements, if applicable.
6. Recording as “debt” and transfer of title.
The Hearing Officer in Bridgestone/Firestone, Inc., found the accounting standards issued by the Financial Accounting Standards Board to be applicable to the determination of whether a transaction should be considered a lease or a mortgage. See DOAH Case No. 92-2483, ¶ 16, 15 FALR 4874 (1993). For a “lease” to be reported as a “debt,” Statement of Financial Accounting Standards, No. 13 requires that “the lease transfe[r] ownership of the property to the lessee.” See Bridgestone/Firestone, Inc., DOAH Case No. 92- 2483, ¶ 16, 15 FALR 4874 (1993). Statement of Financial Accounting Standards, No. 13 has been superseded, in part, by Statement of Financial Accounting Standards, No. 98, which provides, in relevant part:
A lease involving real estate may not be classified as a sales-type lease unless the lease agreement provides for the transfer of title to the lessee at or shortly after the end of the lease term.
See ACCOUNTING FOR LEASES, Statement of Fin. Accounting Standards, No. 98 (Fin. Accounting Standards Bd. 2008).
There is no provision in the Real Property Lease for title of the property to transfer to Taxpayer at the end of the lease term, and Taxpayer’s option to repurchase the property has passed. Therefore, the Real Property Lease cannot be classified as a “sales-type lease” or a mortgage. As such, it must be found to be a true lease.
A case that is relevant to this discussion and that supports this finding is Holmberg. In Holmberg, land acquired from Spain was transmitted to the Governor of Florida. 90 Fla. at 790-91. In 1855, the State vested title to the land in five State officers as “Trustees of the Internal Improvement Fund,” who had express authority to fix the price of the land and to make arrangements for its settlement and cultivation. Id. at 792. In 1908, the Trustees conveyed some land to Richard Bolles, and the Trustees held a mortgage on the property. Id. at 796. Various other agreements were also entered into between the parties with regard to the property, such as an agreement regarding drainage. Id. at 796-97. Mr. Bolles was subsequently unable to make payments so, on November 28, 1914, he entered into another agreement in which he reconveyed the remainder of the land that had been included in the mortgage to the Trustees. Id. at 795, 797-98. In return, the Trustees agreed to cancel and return two notes and the mortgage to Mr. Bolles and to assume the unpaid taxes on the land. Id. at 798. The Trustees also agreed that they would reconvey the land to Mr. Bolles at any time on or before June 1, 1915, upon receipt of $200,000 and upon repayment of various taxes the Trustees had paid. Id. at 799. At issue was whether the parties intended the deed executed by Mr. Bolles and delivered to the Trustees to be a mortgage to secure the payment of money or a deed absolute, with the option for Mr. Bolles to repurchase the land.29 Id. at 804. Reviewing the intent of the parties and the facts of the matter, the Court determined that it had been the intention of the parties: 1) to make an adjustment and settlement of the indebtedness; 2) that the indebtedness be settled and cancelled by the execution of the deed by Bolles; and 3) that the Board of Trustees pay the taxes and redeem the tax sale certificates. Id. at 806. Then, there followed the agreement upon the part of the Trustees that they would convey the property to Mr. Bolles again if he paid the Trustees $200,000 and the money for the taxes before June 1, 1915. Id.
The Florida Supreme Court opined:
A feature essential to a mortgage is an indebtedness which it is designed to secure. The existence of this is not implied in a provision that a bill of sale shall be void if the grantors shall 'pay' a certain sum of money by a certain day. Payment of money does not necessarily imply a previous binding obligation to pay, but may be made as a recompense or equivalent for some present benefit, the procurement of which is optional with the payer.
Id. at 807-808 (quoting Smith v. Hope, 47 Fla. 295, 35 South. Rep. 865 (1906) (italics supplied).
The Court continued, stating that a deed absolute in form cannot be held to be a mortgage without there being proof of an obligation to be secured by it, whether it is in the form of an antecedent debt between the parties, or a loan, debt, or assumption of liability. Id. at 808 (citations omitted).
‘A definitive test to determine whether an absolute deed, executed in consideration of a precedent debt, with an attendant agreement to reconvey the premises to the grantor on payment of the consideration, constitutes a mortgage or a conditional sale is found in the question, whether the debt was discharged by the deed or subsisted afterward. On the one hand, if the conveyance satisfied and extinguished the obligation, so that no debt remained due from the grantor to the grantee, it cannot be held a mortgage, since there cannot be a mortgage without something to be secured by it. And in that case the grantor's privilege of refunding the consideration, and so entitling himself to a reconveyance, is not to be regarded as an equity of redemption, but is a badge of conditional sale.’
Id. at 808 (quoting 27 Cyc. 1010; Holmes v. Warren, 145 Cal. 457, 78 Pac. Rep. 954; Carroll v. Tomlinson, 192 Ill. 398, 61 N.E. Rep. 484; Doying v. Chesebrough (N.J. Ch.) 36 A. 893; Blazy v. McLean, 129 N.Y. 44, 29 N.E. Rep. 6).)
The Court further opined:
If it is a debt which the grantor is bound to pay, which the grantee might collect by proper proceedings, and for which the deed of the land is to stand as security, the transaction is a mortgage, but if it is entirely optional with the grantor to pay the money and receive a reconveyance or not to do so, he has not the right of a mortgagor, but only a privilege of repurchasing the property.
Id. at 809 (quoting 27 Cyc. 1003; Reed v. Bone, 96 Mich. 134, 55 N.W. Rep. 619; Gassett v. Bogk, 7 Mont. 585, 19 Pac. Rep. 281, 1 L. R. A. 240; Wood v. Jansen, 130 Cal. 200, 62 Pac. Rep. 673)).
Quoting 19 R.C.L., Sec. 35, Mortgages,30 the Court continued:
There is a test generally accepted as decisive, and this is the mutuality and reciprocity of the remedies of the parties — that is to say, if the grantee enjoys a right, reciprocal to that of the grantor to demand reconveyance, personally to compel the latter to pay the consideration named in the stipulation for reconveyance, the transaction is a mortgage; while if he has no such right to compel payment, the transaction is a conditional sale. . . .
See Holmberg, 90 Fla. at 809.
In the instant case, when Taxpayer conveyed the gas station to Buyer/Lessor, there was no indebtedness from Taxpayer to Buyer/Lessor with regard to the property conveyed in the deed. Taxpayer leased the property back from Buyer/Lessor and, in so doing, created an indebtedness to pay the amount of rental consideration in the lease, which amount was secured by Taxpayer’s Managing Member and other affiliates of Taxpayer; however, the conveyance of the property from Taxpayer to Buyer/Lessor was absolute. Taxpayer conveyed all of its right, title and interest to Buyer/Lessor in a Special Warranty Deed. The property Taxpayer conveyed to Buyer/Lessor cannot be viewed as the debt or security, as Taxpayer contends, because Taxpayer owes nothing on the property to Buyer/Lessor. In addition, even if Taxpayer pays the entire loan amount, it will have no ownership of the property and there is no provision in the lease or any other document by which Taxpayer can take ownership of the property. The option to repurchase the property has passed. Buyer/Lessor has a reversionary interest in the property during the life of the lease, but this will ripen into perfect title at the expiration of the lease term, if not earlier. See State Road Dept. v. White, 148 So. 2d 32 (Fla. 2nd DCA 1962), cert. denied, 161 So. 2d 828 (Fla. 1964). By contrast, in cases in which the transactions were found to be mortgages, the lessors never gained full title at the end of the leases. In Bridgestone/Firestone, Inc., e.g., the lessee was obligated to pay the remaining purchase price at the end of the lease either by purchasing the property or by selling the property to a third party. Since the lessor had no reversionary interest, the lease agreement resembled a contract for deed, which was found to be entitled to mortgage protection. See Bridgestone/Firestone, Inc. v. Dep’t of Revenue, DOAH Case No. 92-2483, 15 FALR 4874 (1993). Similarly, in the TAA Taxpayer made reference to, TAA 04M-002, the tenant was required to purchase the property and the landlord was required to sell the property to the tenant at the end of the lease term.
As was the case in Holmberg, Taxpayer had no obligation to repurchase the gas station when it conveyed the property to Buyer/Lessor and entered into the Limited Right to Purchase. Taxpayer’s decision as to whether to repurchase the gas station was completely optional. The Warranty Deed Taxpayer conveyed to Buyer/Lessor was not security for anything and Taxpayer owed nothing on the property to Buyer/Lessor. The lease was not such that any payments would ever result in the ownership of the property, either. Since it was Taxpayer’s prerogative as to whether it would pay the money and receive a reconveyance or not, the transaction constituted a conditional sale, which condition is no longer valid. See Holmberg, 90 Fla. at 809. In that the transaction does not constitute a mortgage, the lease payments are subject to tax pursuant to section 212.031(1)(a), F.S., and Rule 12A-1.070(1)(a), F.A.C.31
Conclusion
Taxpayer’s sale and subsequent lease back of the gas station does not constitute a mortgage. Taxpayer has entered a true lease with Buyer/Lessor. As a result, Taxpayer’s lease payments are subject to sales tax.
This response constitutes a Technical Assistance Advisement under section 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 section 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 that expressed in this response. You are further advised that this response, your request and related backup documents are public records under Chapter 119, F.S., and are subject to disclosure to the public under the conditions of section 213.22, F.S. Confidential information must be deleted before public disclosure. In an effort to protect confidentiality, we request you provide the undersigned with an edited copy of your request for Technical Assistance Advisement, the backup material, and this response, deleting names, addresses, and any other details which might lead to identification of the taxpayer. Your response should be received by the Department within 15 days of the date of this letter.
Katharine Heyward
Senior Attorney
Technical Assistance & Dispute Resolution
(1) The Special Warranty Deed signifying the sale was re-recorded on XXXXX and additional Documentary Stamp Tax was assessed on $760,000 of additional consideration. See Official Records, XXXXX County, Florida, Book XXXX, Page XXXX. The Deed states that the purpose of the Deed’s being re-recorded was to correct the amount of consideration (by adding $760,000 to the original $1,520,000). Therefore, it is possible that the sales price of this transaction was more than $1,520,000. It should be noted, however, that the XXXXX’s Property Appraiser’s website reflects a “multiproperty” sale from XXXXX to Taxpayer under the parcel in question’s record in the amount of $760,000 on 1/30/20. See Official Records, XXXXX County, Florida, Book XXXX, Page XXXX, and http://XXXXX.floridapa.com/.
(2) See Official Records, XXXXX County, Florida, Book XXXX, Page XXXX.
(3) It is assumed that Taxpayer intended to say “January, 2021.”
(4) It should be noted that “[t]echnical assistance advisements . . . have no precedential value except to the taxpayer who requests the advisement and then only for the specific transaction addressed in the technical assistance advisement . . . .” See s. 213.22(1), F.S.
(5) The documents Taxpayer listed are:
- Special Warranty Deed – XXXXX selling to Taxpayer
- Re-Recorded Special Warranty Deed – XXXXX selling to Taxpayer – reflecting change in consideration from $760,000 to $1,520,000.
- Special Warranty Deed – Taxpayer selling to Buyer/Lessor
- Certificate of Organization of Buyer/Lessor
- Real Property Lease with an Effective date of February 12, 2020.
- Option to Repurchase Letter
- E-mail between XXXXX and Taxpayer
- Copy of sales tax filings for Buyer/Lessor for October, November, and December 2020
- Copies of first page of other leases in the Real Estate Portfolio between Taxpayer and Buyer/Lessors
(6) It should be noted that “sale-leaseback” arrangement is Taxpayer’s terminology. Use of this term in reference to the Taxpayer is not meant to imply that the Department regards the transaction as a “sale-leaseback” transaction.
(7) See Exhibit D-1 of the Real Property Lease.
(8) See e-mail from XXXXX, President and CFO of XXXXX, dated January 15, 2021.
(9) In an e-mail dated January 15, 2021, the President of XXXXX states that Buyer/Lessor is an “SPE” created by XXXXX. “A ‘single purpose entity’ (“SPE”) is an entity, usually a limited liability company in the context of a real estate transaction, created by a parent company to isolate financial risk and provide increased security to any legal entity. The SPE’s legal status as a separate company makes its obligations separate from the parent company . . . .” See http://monumentllp.com/index.php/2020/03/31/single-purpose-entity-speexplained/#:~:text=A%20%E2%80%9Csingle%20purpose%20entity%E2%80%9D%20%28%E2%80%9CSPE%E2%80% 9D%29%20is%20an%20entity%2C,collateral%20from%20potential%20troubles%20of%20the%20parent%20compa ny.
(10) See Section 13 of the Real Property Lease.
(11) Some of Taxpayer’s statements regarding its obligations in the event of casualty and condemnation are contrary to those in the Lease. See Sections 14 and 15 of the Real Property Lease. In addition, Buyer/Lessor agrees to take reasonable efforts to mitigate damages in the event of Taxpayer’s default in the Lease. See Section 18.3 of the Real Property Lease.
(12) See Section 2.1 of the Real Property Lease.
(13) See Section 27 of the Real Property Lease.
(14) See Real Property Lease, Exhibit D-1.
(15) See United Airlines, Inc. v. HSBC Bank USA, N.A., 416 F.3d 609, 612 (7th Cir. 2005).
(16) See, e.g., Marriott Family Restaurants v. Lunan Family Restaurants (In re Lunan Family Restaurants), 194 B.R. 429 (Bankr. N.D. III 1996) (nominal option price indicative of financing transaction); In re KAR Dev. Assocs., LP, 180 B.R. 597, 610 n. 64 (Bankr. D. Kan. 1994).
(17) See e-mails and Limited Right to Purchase Agreement.
(18) See, e.g., In re United Air Lines, Inc., 447 F.3d 504, 508 (3rd Cir. 2006); In re 716 Third Avenue Holding Corp., 340 F.2d 42, 46 (2d Cir. 1964); In re San Francisco Indus. Park, Inc., 307 F. Supp. 271, 274-75 (N.D. Cal. 1969).
(19) See Taxpayer’s schedule of the sales history of the facility.
(20) See, e.g., In re PCH Assocs., 804 F.2d 193, 200 (2d Cir. 1986); Kemp Indus., Inc. v. Safety Light Corp., 857 F. Supp. 373, 391 (D.N.J. 1994); In re KAR Dev. Assocs., LP, 180 B.R. at 639; In Re Dena Corp., 312 B.R. 162, 170 (Bankr. N.D. Ill. 2004); Fox v. Peck Iron Metal Co., 25 B.R. 674, 688 (Bankr. S.D. Cal. 1982); In re Nite Lite Inns, 13 B.R. 900, 909 (Bankr. S.D. Cal. 1981); Blue Barn Assocs. v. Picnic 'n Chicken, Inc. (In re Picnic 'n Chicken, Inc.), 58 B.R. 523, 527 (Bankr. S.D. Cal. 1986).
(21) See Section 6.4 of Real Property Lease. See also United Airlines, Inc., 416 F.3d at 617; First Nat’l Bank of Chicago v. Irving Trust, 74 F.2d 263 (2d Cir. 1934).
(22) See, e.g., In re KAR Dev. Assocs., LP, 180 B.R. at 639; In re Picnic 'n Chicken, Inc., 58 B.R. at 527; Fox, 25 B.R. at 688; In re Nite Lite Inns, 13 B.R. at 909.
(23) See, e.g., Kemp Indus., Inc., 857 F. Supp. at 390 (“USR’s control over the selection and use of the property indicate Prudential took title to the property not to obtain the conventional benefits of ownership but to protect its financing of USR’s expansion.”).
(24) As stated above, the transaction that is the subject of this TAA is one of XXX transactions Taxpayer entered into with XXXXX’s SPE’s, all of which involve sales of gas stations to XXXXX and leases of those gas stations back to Taxpayer. Taxpayer’s hope is that, if it obtains a favorable ruling regarding this transaction, it can apply the ruling to some or all of the other facilities.
(25) When Taxpayer has referred to this type of transaction, it has used the terms “financing arrangement” or “financing arrangement/mortgage,” but the Department chooses to use the term “mortgage” because “mortgage” is statutorily defined. See s. 697.01, F.S.; Bridgestone/Firestone, Inc., Final Order, DOR 93-22-FOF (1993). This statement is not intended to imply that the Department regards this transaction as a mortgage, however.
(26) See Bridgestone/Firestone, Inc. v. Dep’t of Revenue, DOAH Case No. 92-2483, 15 FALR 4874 (1993).
(27) At no point did Taxpayer have an option to repurchase the property for a nominal amount. If it had, the arrangement would have been more indicative of a conditional sale-type lease. See Rule 12A-1.071(1)(d), F.A.C.
(28) A triple net lease is a lease agreement on a property whereby the tenant or lessee promises to pay all the expenses of the property, including real estate taxes, building insurance, and maintenance. These expenses are in addition to the cost of rent and utilities. See Investopedia, https://www.investopedia.com/terms/t/triple-net-lease-nnn.asp.
(29) It is noted that, in the instant case, Taxpayer did not convey the gas station to Buyer/Lessor to satisfy a debt; however, the case is relevant because, when Mr. Bolles reconveyed the remaining land under the mortgage to the Trustees and Taxpayer conveyed the gas station to Buyer/Lessor, both were in the same starting position of owing nothing to the other party with respect to the land.
(30) “R.C.L.” appears to be a reference to “Ruling Case Law (RCL),” which is a legal treatise that summarizes the common law. See Respondent, Great Southern Restaurant Group of Pensacola, Inc.’s Brief on Jurisdiction, SC17- 1238 (L.T. 1D16-4121 – Merrill Land, LLC, and Great Southern Restaurant Group of Pensacola, Inc. v. City of Pensacola and Seville Harbour, Inc., 277 So. 3d 48 (Fla. 1st DCA 2017)) at https://efactssc-public.flcourts.org/CaseDocuments/2017/1238/2017-1238_Brief_125468.pdf.
(31) The transactions involving the other gas stations have not been addressed in this TAA because the ruling is not favorable to Taxpayer and not enough information was provided.
