Were payments under the synthetic lease taxable as real- or personal-property rent?

Subject

Real Property Transaction/Lease or Mortgage

Plain-English summary

The payments were not taxable rent because the transaction was a financing arrangement and mortgage substitute, not a true lease. The trust and bank trustee held bare legal title solely to facilitate lender loans and holder advances used to acquire, construct, renovate, and test the properties.

The lessee selected and developed the property, made absolute and unconditional payments tied to financing yields and amortization, and held purchase or sale options. Those payments repaid debt rather than purchasing the right to occupy real estate or rent tangible personal property.

What this means for you

The label “Lease Agreement” did not control. Florida examined the transaction's economic purpose, title function, payment formula, termination rights, financing documents, and purchase options. The ruling was limited to sales tax and expressly did not decide documentary stamp or intangible tax.

Common questions

Q: Was the bank trustee treated as a landlord? No. It administered the financing and held bare legal title.

Q: Were the lessee's payments treated as rent? No. They were determined by lender notes and holder advances, not market rent.

Q: Did the ruling clear every Florida tax? No. It offered no opinion on documentary stamp tax or intangible tax.

Citations and references

• Fla. Stat. § 212.031(1)(a), (1)(c) — tax on real-property rentals
• Fla. Stat. § 212.05(1)(c) — tax on tangible-personal-property rentals
• Fla. Admin. Code r. 12A-1.070 — real-property rentals
• Fla. Admin. Code r. 12A-1.071 — tangible-personal-property rentals
• Bridgestone/Firestone, Inc. v. Department of Revenue, DOAH Case No. 92-2483 — financing entity and bare-title analysis cited by the Department
• Fla. Stat. § 213.22 — Technical Assistance Advisements

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 00A-025

Original ruling text

SUMMARY

QUESTION: Are certain payments made pursuant to an
agreement bearing the legend, Lease Agreement, in
connection with the both real property and tangible
personal property subject to sales tax?

ANSWER - Based on Facts Below: A national bank,
headquartered outside Florida, is described as the
trustee/owner of a trust which holds bare legal title to
real property. The bank is described as a lessor of the
property. The party in possession, described as a lessee,
has agreed to repay certain promissory notes made by the
lessor, which funds are used to acquire or otherwise
construct real property occupied by the lessee. The
consideration paid by the lessee to the lessor is not
subject to sales tax because the payments made by the
lessee are those required under a financing arrangement.

Title: Real Property Transaction/Lease or Mortgage

May 15, 2000

Re: Technical Assistance Advisement 00A-025
Whether a real property transaction creates a lease or
mortgage
XXX (herein Owner Trustee or Lessor)
XXX (herein Lessee)
XXX (herein Trust)
XXX (herein Agent)
XXX (herein Lenders or Holders)
Section 212.031(1)(c), F.S.
Section 212.05(1)(c), F.S.
Rule 12A-1.070, F.A.C.
Rule 12A-1.071, F.A.C.

Dear :

This is a response, styled a Technical Assistance Advisement, to
your letter dated March 9, 2000, in which you asked whether
certain payments made pursuant to an agreement bearing the
legend, Lease Agreement (herein Lease), in connection with both
real property and tangible personal property (herein
Properties), are subject to Florida sales tax. You describe the
Lease as a "synthetic or financing lease" and consequently, you
opine, the payments received pursuant thereto by the Lessor are
not subject to Florida sales tax.

The Lessor is a federally chartered banking institution,
headquartered in XXX. It is also, as provided in the Trust
Agreement, the Owner/Trustee of the Trust. You state that
Lessee is a XXX corporation headquartered in XXX. Neither the
Lessor nor the Lessee is a registered Florida dealer for the
purposes of the collection and remittance of Florida sales tax.

Department Response

Notwithstanding that the word "transaction" is used throughout
the Department response, there are many transactions
contemplated, all of which are subject to and arise from the
agreements discussed hereinafter.

Each Lease is of a term of 6 years with an option granted to the
Lessee to renew the agreement for three additional five-year
terms. You have provided the Department with the following
documents, all of which are essential elements of the
transaction.

Lease Agreement
Participation Agreement
Agency Agreement
Trust Agreement
Security Agreement
Credit Agreement

The transaction arises from a desire of the Lessee to acquire,
by purchase or by ground lease, the Properties for the purpose
of developing, renovating, constructing, and testing such
Properties in furtherance of its business. With this intention,

the above documents are created and agreement is reached with
the various parties thereto.

Essentially, Lessee will initiate a request to buy or lease a
parcel of land together with a detailed enumeration of costs.
This transmittal is termed a Requisition and is in the form as
depicted in Exhibit A attached to the Participation Agreement
and also described in Section 4.2 and Section 5.2 of the
Participation Agreement. The Properties that are the focus of
the transaction(s) are defined in Appendix A-27, which is a part
of the Participation Agreement, as land, equipment, improvements
and property relating to the construction period and property
subject to any ground lease.

The Participation Agreement is a contract executed by the
Lessor; Lessee; Holders; Lenders; and, the Agent, as agent of
the Lenders and Holders, and as an agent of the Lenders, solely.
Title to all Properties acquired, as a consequence of inclusion
in the Requisition, is to be in the Trust, and the Lessor has
the obligation of obtaining good title to the Properties
pursuant to a deed, bill of sale, or ground lease as described
in Section 3.2 of the Participation Agreement.

The Agency Agreement is a contract between the Lessor and the
Lessee whereby, in Section 2.1, the Lessor appoints the Lessee
"... as its exclusive agent and as general contractor...."
Pursuant to this agreement, as set forth in Articles 2.1, 2.4,
3.1 and 3.2 of the Agency Agreement, the acquisition of the
land, or in some instances the lease of land (hence reference
within this letter of a ground lease), the construction of
improvements, purchase of construction materials, and oversight
of all such effort are the duties of the Lessee, who is named in
the agreement as the Construction Agent.

Thus, the Lessee is identified as acting in both capacities,
that is, as Lessee and as Construction Agent. The agreement
also specifies in Section 2.1 that the "... Lessor will advance
[to the Lessee] no more than the sum of the aggregate [of the
loans from the Lenders and the advances from the Holders]."

Subject to the provisions in Section 1 of the Participation

Agreement, the Lenders (banking institutions) will make loans to
the Lessor in allocations previously agreed in total amounts,
not to exceed 97 percent, as specified in Section 2.5 of the
Credit Agreement, of the requested funds specified in the
Requisition. The remaining 3 percent of the requested monies
will be obtained from Holder Advances. Holders are entities
(banking institutions) which are committed to providing monies
(Holder Advances) to finance the transaction and are to receive,
in exchange, certificates of trust from the Trust. The
certificates are described in Section 3.1 of the Trust and in
Exhibit A attached to the Trust Agreement.

The Trust, as described in Sections 2.2 and 2.3 of the Trust
Agreement, is formed for the sole purpose of acquiring and
holding title to the Trust Estate. The term "Trust Estate" is
given, by definition in Appendix A-32 of the Participation
Agreement, the meaning as provided in Section 2.2 of the Trust
Agreement. The Trust, as evidenced by the provisions in Section
2.2 of the Trust Agreement, will hold all rights, title, and
interest in the Trust Estate for the benefit of the Holders
subject to the rights of the Lenders. The Trust receives the
cash advances from the Holders for the purpose of developing,
acquiring, installing, constructing, renovating and testing the
Properties that are the subject of the Lease.

The Security Agreement, executed by the Lessor and the Agent,
conveys a security interest in the estate of the Trust to the
Lenders and Holders, which secures the payment of previous loans
and advances made to the Trust by the Lenders and Holders. In
Article 24 of the Security Agreement, the Lessee is also a party
to this agreement. The conveyance of the grant of the interest
and the properties affected is described in Article 2 of the
Security Agreement.

The Credit Agreement requires a commitment of the Lenders and
the Holders to make, respectively, loans and advances to the
Lessor as each of the Lenders are enumerated, as the amounts of
each Lenders commitment is specified in Schedule 2.1 attached to
the Credit Agreement. The amounts and the terms of these
commitments are described in Section 2.1 of the Credit
Agreement. Such loans and advances to the Lessor are presented

as promissory notes, which are further, explained in Section 2.2
of the Credit Agreement. The notes bear a return as set forth
in Sections 2.8 and 2.9 of the Credit Agreement. Within this
agreement in Sections 9.7 and 9.8, a Lender may sell or assign
its rights to other institutions.

The interest to be paid to the Lenders on the loans is described
in sections 2.8 and 2.9 of the Credit Agreement, which may
include rate of the prime interest rate in the United States or,
if a Eurodollar loan then a Eurodollar rate. The funds received
by the Trust from Holders will be computed as describe in
Section 3.7 of the Trust Agreement, and the yield may be
computed using the "prime interest rate.'" All payments to the
Holders, as described in Section 3.5 of the Trust Agreement,
will be made from income and proceeds of the Trust Estate. The
Holders will have a beneficial interest in the estate of the
Trust but will have no legal title, as specified in Section 11.1
of the Trust Agreement.

After the properties are in operation, the Lessor has the duty
to collect all rents and other amounts required to be paid by
the Lessee. Section 4.1 of the Trust Agreement sets out the
Lessor's responsibility to collect such monies from the Lessee.

The Lease binds the Lessee to the payments required therein by
words in Article VI, which speak of obligations "absolute and
unconditional." The provision in Article VI state that the "...
Lease shall not terminate, nor shall Lessee be entitled to any
abatement... with respect to the [r]ent... for any reason
whatsoever...." Further, there is a strict waiver by the Lessee
of certain rights, as described in Article 6.2 of the Lease.
One provision reads that the "Lessee shall remain obligated
under this Lease in accordance with its terms and shall not take
any action to terminate, rescind or avoid this Lease...."
Another provision in this article provides that "(a) Lessee
hereby waivers all right [to terminate or surrender this Lease]
or (b) to avail itself of any abatement suspension... [of the
rent payment]."

The Lease contains provisions for its termination. Article 16.2
states that on the termination date "... Lessee shall pay to

Lessor the Termination Value for the applicable property, and
Lessor shall convey such property... to Lessee...." In Article
XIX of the Lease, the termination creates in the Lessee the
right to exercise its purchase option of the properties. The
purchase option is more fully described in Article XX of the
Lease.

Pursuant to one occurrence, that being a certain period prior to
the expiration date of the Lease, the Lessee may elect to
purchase the properties. This election is described in Article
20.1 of the Lease. The provisions as to the purchase option and
the conveyance of the properties to the Lessee by the Lessor are
set forth in Article 20.2 of the Lease. Lessee, as provided in
Article 20.3, may elect to sell the properties to one or more
third- party buyers as further described in Article 22.1 of the
Lease.

As to the Florida law that applies to the fact pattern described
above, which involves real property and tangible personal
property, s. 212.031(1)(a), F.S., imposes sales tax on the
privilege of engaging in the business of leasing or of granting
a license to use or occupy real property. Section
212.031(1)(c), F.S., requires the tax to be paid on the "total
rent or licensee fee" received by the lessor or licensor of the
real property. Rule 12A-1.070, F.A.C., interprets the statutes.
Section 212.05(1)(c), F.S., levies Florida sales tax on the
gross proceeds from the lease or rental of tangible personal
property. Rule 12A-1.071, F.A.C., interprets the statute.

Applying the statutes to the facts as provided to the
Department, a conclusion is reached that there is no
landlord/tenant relationship between Lessee and Lessor. Thus,
there is no total rent or license fee paid, with respect to real
property, considering the requirements of s. 212.031(1)(c),
Florida Statutes. Neither is the Lessor a lessor of the tangible
personal property.

The Lessor is not the landlord, because the transaction
represents a financing arrangement rather than the execution of
a lease. This conclusion is based on the following factors:

(1) The reason for the creation of the Trust and the Lessor's
attendant duties thereto is solely to serve as a single purpose
financing device. The Trust takes title to the Properties,
which are selected by the Lessee and which are constructed,
renovated, improved, or tested by the Lessee. The consideration
received by the Lessor is not given in exchange for the right to
occupy or use real property by the Lessee (which is the basis
for the imposition of Florida sales tax) but rather is the
payments made by the Lessee in liquidation of the notes made by
the Lessor as borrower to the Lenders, and in repayment to the
Lessor of the Holder Advances made by various banking
institutions to the Lessor.

As a consequence, the Lessor is not in the business of engaging
in the conveyance of a lease or in the granting of a license to
use real property. Rather, the Trust and the Lessor are created
to serve as integral parts of the entire financing arrangement.
Neither the Trust nor the Lessor is a landlord. The Lessor
serves more in a capacity of the administrator of the
transactions.

To accomplish this end, the Trust holds bare legal title to the
properties over which the Lessor has control as described in the
above cites to the relevant documents, copies of which you have
provided the Department. The title or ownership is not as a
landlord but as an essential part of the entire financing
mechanism.

The Trust and the Lessor serve the same function as the single
purpose financing corporation described in
Firestone/Bridgestone, Inc. v. Department of Revenue, DOAH Case
Number 92-2483. In that case, as in the instant fact pattern,
the holder of title to the property was deemed to be solely
created for the purpose of facilitating the financing of the
transaction. A similar finding is made here. Neither the Trust
nor the Lessor is created as a landlord of the properties, but
rather as an essential part of the plan to borrow money.

(2) The Lessor does not receive a rental or license fee in the
ordinary sense of the economic owner of property attempting to
maximize income from an investment by charging a rent or fee

determined by the market value of the real property. Rather,
the Lessor receives, from the Lessee, payments in amounts to pay
the agreed yields on the notes in favor of the Lenders and
yields on the Advances tendered to the Lessor by the Holders.

(3) The Lessee is not a tenant of the Lessor. Lessee, as a
requirement for the financing of the acquisition, construction
or renovation and testing of the properties has agreed to repay
promissory notes made by the Lessor, as a borrower, to the
Lenders and has accepted the obligations which arise as a
consequence of the Advances. The Lessee has incurred financial
obligations the repayments of which are not consistent with the
payments made by a tenant for the right to use or occupy the
real property. As required under the Lease, the Lessee pays
money, the sum of which is solely determined by repayment
schedules required under financing documents enumerated above.
This payment is not a "rent" which arises from a computation of
expected economic gain from the ownership of real property. The
amount of the payment rather is determined solely from the
return required by, and the amortization of, the notes and the
Advances.

The Lessee is bound by the provisions in Article VI of the Lease
to continue the "rent" payments as an absolute and unconditional
obligation. In this Article, as noted previously, the Lessee
waives the right to terminate the Lease (except as expressly
provided therein) or to take any action to abate the payment of
the rent. These provisions speak of obligations arising from a
debt, rather than from a conveyance of a typical lease of real
or personal property.

The transaction is one designed to accomplish the financing of
the Properties, including the purchase, construction,
renovation, and testing of such Properties, with the Lessee
allowed the expenses of deprecation and interest for federal tax
purposes; but for accounting recordation, the lease payments are
noted as lease payment expenses as allowed for what is known as
an "operating lease." In Bridgestone/Firestone, supra, it was
stated "... a taxpayer can treat an item one way for financial
reporting purposes and another way for tax purposes". A
determination is made based on the consideration of all the

facts provided the Department that the Lease and the other
enumerated documents are in the nature, not of an operating
lease, but rather of a mortgage substitute.

Thus, a conclusion is reached that the payments made by Lessee
pursuant the requirements, duties, and obligations arising from
the documents noted above and the purpose of such documents as
described herein do not come within the reach of either s.
212.031(1)(c) F.S., which imposes Florida sales tax on the
"total rent or license fee" paid for the right to use or occupy
real property, or of s. 212.05(1)(c), F.S., which imposes the
tax on the gross proceeds from the lease or rental of tangible
personal property.

You are alerted that this conclusion does not offer an opinion
as to the liability of the parties for the payment of other
Florida taxes, including but not limited to the Florida
documentary stamp tax or the Florida intangible tax.

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 and
related backup documents 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. 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.

Sincerely,

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

Ctrl. No. 40617