A Phone Call Request From a Property Appraiser’s Deputy

The caller asked for an explanation regarding the disqualification of a certain sale of real property that was conveyed “subject to” a long-term lease with a public corporation of high credit.

TO:         (deleted)

Office of the Property Appraiser

 FROM:  Sheila Anderson

 DATE:   February 1, 2012

 REF.:      (deleted)

Typically what I’ve seen is that a deed, if well drafted, will include an Exhibit B and all the easements of record or other title-related documents including leases, would be listed in that exhibit. However, not every attorney or the custom in every State follows the same pattern, so a clue in the documents often is a statement that the deed includes all tenements, hereditaments, and appurtenances. 

In addition, IF a tangible property return is filed, using a business name rather than the name of the owner of record, it’s very likely a lease is involved. But even if a property is owner-occupied and then sells, if the selling price is higher than conventional cost approach, it’s a very good clue that more than real property was included in the transaction.

For, assessments are intended to be either real property – which is defined in Chapter 192 – or tangible personal property – also defined in Chapter 192. See 192.001(12), Florida Statutes for the real property definition which refers to land, buildings, fixtures, or attachments to the land. In other words, physical improvements. Everything else is in one of the four categories of personal property – which includes intangibles;  and leases, which are contracts, are intangibles, see 192.001(11).

Intangibles are taxed only by the State, and should not be assessed locally in the ad valorem tax scheme. And, in the case of lease contracts - sales tax is collected on rent as it’s paid each month (typically), so there is a collection of revenue.

In addition, relying on the actual rent flowing from a lease-contract would NOT be consistent with value in exchange, which is the principle followed in Florida. That’s why “market” is so important in the assessment process – for value in exchange as it relies on market data also is incorporating the principles of uniformity (see 195.0012, Fla. Statutes).

SO, in the case of the Subject property, it’s obvious from the name of the owners of record, and the presence of a public “credit” corporation known for engaging in long-term lease contracts, in which there are corporate guarantees, that the property would have sold “subject to” the lease. And because of the presence of a corporate guarantee from a credit-worthy public corporation, a landlord would have a high degree of “security” that the rent would be paid for the term of the lease contract. In effect, that’s quite like a bond, and even more secure than an investment in the stock market which may have greater risk than an investment in this highly sophisticated means of making a financial decision.

If you compare the motivation of this kind of transaction with the “arms length definition” as required in 193.011(1), Florida Statutes, and in DOR Guidelines 12D-51.003 (see section 3.1.8), you’ll find business, financial, and even personal reasons for these transactions. The tenant gains 100% financing of its operating unit by engaging in the initial sale/leaseback; and that’s both a business and a financial benefit. The landlord gets financial benefits by obtaining a steady revenue stream for a defined period of time which also means financial management rates of return can be employed and the landlord can reinvest the rent in other investment vehicles, effectively earning interest on interest – probably similar to the strategies employed by someone like Mitt Romney. There are federal tax benefits involved for landlords and tenants, as well. And, there probably are personal reasons for some of the transactions especially when landlords are individuals, even through an LLC because there may be some trophy implications – as in “see, I own something which involves a business relationship with xyz which is a highly regarded company“.

And, the reality is that every time a property is sold, subject to a lease, or in any circumstances, if the landlord can attract a buyer who will pay a higher price, so the seller makes a profit, that event will raise the purchase price – having nothing to do with the “market value” of a property. Although it’s interesting in the subject case that the 2011 purchase price is less than the price paid in 2006 – during the bubble period – which raises a question about the potential need of the seller – if there is/was any duress involved.

SO, DOR promulgates a list of reasons related to qualifying or disqualifying sales. Most jurisdictions disqualify sales which are “subject to” long term credit leases, for the reasons stated above and more. Effectively, the transactions include “an abundance of personal property” and are typically higher than market (the Valencia decisions).

How would you know if the “income approach” would reflect typical market? Take your customary cap rate, apply it to selling price, divide by square footage, and see what the imputed rental rate would be. If that imputed rent is similar to the rents for vacant spaces in the same classification, then the transaction price, less costs of sale, might be consistent with “value in exchange”.

BUT, if the purchase price is different than the typical cost approach and/or imputed rent is different, and you can get imputed rent out of the cost approach as well, then the sale should be disqualified for you would not be able to use it lawfully to assess any other property and to use it only to assess the subject would be tantamount to “chasing the sale” which is unlawful.

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