Did an arena owner's reserved estate for years create taxable rent after conveying the property?

Subject

Lease of Arena

Plain-English summary

The arena owner's reserved occupancy interest was not a taxable leaseback. Its right to occupy came from the estate for years reserved in the warranty deed, not from a new grant by the sports authority in the document labeled a lease.

What this means for you

The legal source of possession controlled. A document's lease title did not create taxable rent when the deed itself reserved the owner's estate.

Common questions

Q: Did the sports authority grant the occupancy right? No.

Q: Where did the right come from? The warranty deed's reservation.

Q: Did the separate lease label control? No.

Citations and references

• Fla. Stat. § 212.031 — tax on leases and licenses to use real property
• Fla. Stat. § 213.22 — Technical Assistance Advisements

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 00A-036

Original ruling text

SUMMARY

QUESTION: Does the grantor's reservation in a general
warranty deed of an estate for years constitute a lease of
the reserved property interest when the terms and
conditions of the reserved interest are described in a
document designated as a lease?

ANSWER - Based on Facts Below: Because it is the
reservation in the deed, and not a conveyance or transfer
in the document designated as a lease, that gives the
grantor its occupancy rights, the grantee of the deed is
not "renting, leasing, letting, or granting a license for
the use of any real property" to the grantor within the
meaning of section 212.031, F.S.

Jul 03, 2000

Re: Technical Assistance Advisement 00A-036
Sales & Use Tax - Lease of Arena
Section 212.031, F.S.
XXX ("Taxpayer")
FEI#

Dear :

This is in response to your request, dated June 1, 2000, for the
Department's issuance of a Technical Assistance Advisement
("TAA") concerning the above referenced party and matter. Your
letter has been carefully examined and the Department finds it
to be in compliance with the requisite criteria set forth in
Chapter 12-11, F.A.C. This response to your request constitutes
a TAA and is issued to you under the authority of section
213.22, F.S.

Facts

The Taxpayer owned a parcel of real property (the "Property") in

a metropolitan area of Florida and wished to construct an arena
(the "Arena") to be used for sports and other public and private
purposes. The Taxpayer entered into agreements (evidenced by a
number of documents) with a public agency and political
subdivision of the State of Florida, hereafter referred to as
the "Sports Authority." As part of the agreements, the Taxpayer
agreed to transfer the Property to the Sports Authority,
reserving an estate for years of 30 years (with options to
extend the reserved estate for two additional 5-year periods).
The Taxpayer also agreed to build the Arena on the Property.
The Sports Authority agreed to pay part of the construction cost
and to aid in the financing of the Arena through the issuance of
revenue bonds.

The transfer of the Property to the Sports Authority was
accomplished through the execution by the Taxpayer of a "Special
Warranty Deed and Bill of Sale" (the "Deed"). The Deed is dated
July 5, 1995, and contained the following language:

RESERVING AND RETAINING, HOWEVER, to Grantor, for itself
and its successors and assigns, the following rights and
interests with respect to the Property:

(i) An estate for years in the Property....

... By its acceptance of this instrument, Grantee further
acknowledges that (i) the estate for years reserved
pursuant to this instrument is an interest in real property
and is not subject to defeasance upon default by Grantor in
the performance of its obligations set forth in Exhibit B
except as specifically consented to therein by Grantor, and
(ii) no consideration is payable to Grantee in connection
with such estate for years.

Exhibit B to the Deed is labeled a "Lease" and is also dated
July 5, 1995. The Lease begins as follows:

THIS LEASE is retained and reserved this 5th day of July,
1995, by... [the Taxpayer]... (herein... called "Tenant")
under the following circumstances:

A. On the date hereof Tenant conveyed to the... Sports
Authority (herein... called "Landlord") fee simple title to
certain real property....

B. Concurrently with the conveyance of fee simple title to
the Land to Landlord, Tenant retained and reserved the
leasehold interests for a term of years specified herein
and rights under this Lease with the effect that Landlord
will be entitled to possession of the Premises (as
hereinafter defined) only upon expiration or earlier
termination of this Lease....

Throughout the Lease, language is used to the effect that Tenant
is "retaining" or "reserving" the Property, or interests in the
Property, and that the Tenant "retains" the right to renew the
Lease for each of two 5-year periods. The Lease further
contains the following provision concerning rent:

The leasehold interests provided in this Lease have been
retained by Tenant upon the conveyance of fee simple title
to the Land to Landlord and therefore no rent shall be
payable hereunder.

The Lease, in establishing the rights and responsibilities of
both parties, states that the Taxpayer shall pay for utilities,
taxes, maintenance fees, and insurance and shall manage the
Arena. The Sports Authority is granted limited rights of access
under the Lease. The Taxpayer is permitted to assign, mortgage,
convey, or encumber any portion of its interest under the Lease.
The Taxpayer has the option to terminate the Lease if, in the
Taxpayer's sole discretion, there is substantial damage to the
property. If insurance proceeds are paid to compensate for such
damage, the Taxpayer has the right to keep the proceeds and
repair the damage, or, if the Taxpayer terminates the Lease, the
proceeds are payable, first, to the Taxpayer to pay existing
mortgages relating to the property, second, to the Sports
Authority to the extent of the outstanding principal of its
revenue bonds relating to the property, and, third, the balance
to the Taxpayer.

The Lease does not require the Taxpayer to construct the Arena.

A separate agreement, labeled a "Turnkey Development Agreement,"
provided for construction of the Arena, and although the Lease
refers to the Turnkey Development Agreement, it does not
incorporate any of its terms. A default by the Taxpayer under
the Turnkey Development Agreement would not terminate the
Taxpayer's reservation of its estate for years under the Deed or
the Lease.

Finally, the Lease, unlike a typical lease agreement, purports
to be executed only by the Tenant and is "accepted and agreed
to" by the Landlord.

As indicated, the Sports Authority agreed to pay part of the
construction cost and to aid in the financing of the Arena
through the issuance of revenue bonds. The financing was
complex, consisting of a number of issues of bonds by the Sports
Authority and the County and Municipality in which the Arena is
located. In order to receive certain State funds, it was
necessary that the Sports Authority, rather than the Taxpayer,
hold title to the property on which the Arena is located.

Requested Advisement

Whether the reservation by the Taxpayer in the Deed of an estate
for years in the Property, and the execution of a "Lease"
agreement pursuant which a leasehold interest is "retained and
reserved," creates a relationship that would be subject to tax
under section 212.031, F.S.

Applicable Law and Discussion

Section 212.031, F.S., provides in relevant part that:

(1)(a) It is declared to be the legislative intent that
every 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....

(c) For the exercise of such privilege, [a] tax is levied
in an amount equal to 6 percent of and on the total rent or
license fee charged for such real property by the person

charging or collecting the rental or license fee....

In Department of Revenue v. Seminole Clubs, Inc., 745 So.2d 473
(Fla. 5th DCA 1999), it was held that payments made by a tenant
for the construction of capital improvements "in lieu of rent"
were taxable under section 212.031, F.S., as payments made for
the use of real property. The instant situation is
distinguishable, however. The tenant in Seminole Clubs did not
have any kind of prior ownership (outright or retained) in the
leased premises prior to the commencement of the lease. The
tenant was granted a possessory interest strictly via a lease
from the landlord. The lease specifically provided that, in
lieu of rent, a certain amount of gross revenues would be
annually spent on capital improvements. If such amounts were not
spent on improvements, then the tenant was obligated to pay the
cash equivalent of such improvements to the landlord as rental
consideration. In the instant situation, the Lease does not
require improvements to be made, and does not address what the
Taxpayer must do if it does not meet its construction
obligations as set forth in the Turnkey Development Agreement.

The instant situation involves unusual circumstances in that the
Taxpayer's interest in the Property results from a "reservation"
in a deed from the Taxpayer, rather than from an interest given
or conveyed by the Sports Authority. A reservation in a deed is
created for the benefit of a grantor of the property "... out of
the thing granted, causing something to exist that had no
existence before the grant." Regency Highland Associates v.
Sherwood, 388 So.2d 271, 272 (Fla. 4th DCA 1980), citing City of
Jacksonville v. Shaffer, 144 So. 888 (Fla. 1932). Thus, a
reservation allows "a grantor's whole interest in the property
to pass to the grantee, but revests a newly created interest in
the grantor." 23 Am. Jur. 2d, Section 72. It is permissible to
reserve a term of years from a conveyance. Id.; c.f., Wise v.
Wise, 184 So. 91 (Fla. 1938), in which it was held that a deed,
by which a grantor reserved the right to occupy the described
premises during his lifetime and the right to the profits from
such Property during the term of his occupancy, conveyed a fee
simple subject to a life estate. The court noted that it is
permissible for grantor to reserve absolute control of the
deeded property, short of a power to dispose of such property,

since control relates solely to the use of such property, and
not to its ownership. Id. at 95.

Thus, in the instant situation, the deed itself created the
right of the Taxpayer to the estate for years. The Sports
Authority received legal title from the grant, but the absolute
control of the property (with the exception of the power to
convey the Arena property) remained with the Taxpayer. State
Road Department v. White, 148 So.2d 32, 34 (Fla. 2nd DCA 1962),
cert. discharged, 161 So.2d 828 (Fla. 1964), held that in the
case of an estate for years, the holder of such interest during
the term "... for all practical purposes is equivalent to
absolute ownership." The Taxpayer granted to itself the right
to occupy, and have rights of ownership in the property for at
least 30 years. No possessory interest in the property was
given by the Sports Authority to the Taxpayer, because the
possessory interest did not pass to the Sports Authority via the
deed. The situation would have been different if the Taxpayer
had transferred the property in fee simple absolute, without any
reservations, to the Sports Authority, and then the Sports
Authority, as owner, transferred its possessory rights to the
Taxpayer.

As noted above, there is attached to the deed, and recorded with
the deed, a document entitled "Lease." The Lease does not grant
any rights from the Sports Authority to the Taxpayer. The Lease
merely refers to the existence of the estate for years set forth
in the deed and reiterates that the Taxpayer has retained such
an interest. The Deed provides that even if the Taxpayer
defaults in performing any of its obligations set forth in the
attached Lease document, the Taxpayer continues to retain its
estate for years. If there had been a complete transfer of
ownership and possessory rights to the Sports Authority via the
Deed, and a subsequent lease back of the property by the
Taxpayer, it would be expected that any defaults of lease
provisions would subject the Taxpayer to eviction. The Lease
document itself indicates that, in general, the Sports Authority
cannot terminate the Lease or otherwise interfere with the use
or possession of the premises by the Taxpayer. Thus, the Deed,
not the Lease, gives the Taxpayer its occupancy rights. Because
the Taxpayer is the grantor of such rights, the Taxpayer is

essentially both the tenant and the landlord in this case. The
Lease merely serves to set forth the scope of the interest
reserved by the Deed. The Lease functions in a manner similar
to restrictive covenants, in that both limit or define the scope
of a property interest. That is, the Lease sets forth the terms
and conditions of the occupancy rights, without creating
occupancy rights.

The existence of the Turnkey Development Agreement ("Agreement")
does not cause the Lease to create any type of occupancy rights.
This Agreement stands alone and is not part of the Deed or the
Lease. It does not create any ownership or possessory rights
and it does not serve in any manner to encumber, disturb, or be
connected to, any occupancy or ownership interests that the
Taxpayer is granted under the Deed, even if a default of its
provisions occurs.

Accordingly, because it is the reservation in the Deed, and not
a conveyance or transfer in the Lease, that gives the Taxpayer
its occupancy rights, the Sports Authority is not "renting,
leasing, letting, or granting a license for the use of any real
property" within the meaning of section 212.031, F.S.

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 upon 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 from that which is 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 that 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 that 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 D. Heyde
Senior Attorney
Control # 41568