How did Florida documentary stamp tax and surtax apply when a hotel ground lessee assigned its purchase option, the fee parcel was conveyed, and the lease was terminated?

Plain-English summary

The Florida Department of Revenue treated the option assignment, the fee-title conveyance, and the paid ground-lease termination as taxable parts of the real-estate transaction. Each step transferred or vested a real-property interest for consideration.

The lessee had developed two hotel buildings and related improvements on land held under a 100-year ground lease. The lessee owned the improvements during the lease term, but the lease provided that title would automatically vest in the fee owner when the lease expired or ended early.

The lease also gave the lessee an option—and later an obligation—to purchase the fee parcel. The lessee assigned that option to an assignee for a payment. The assignee exercised it, paid the ground lessor for the parcel, received the deed subject to the lease, and then paid the lessee to terminate the lease and surrender its possessory rights and investment in the improvements.

The option assignment and deed used the full purchase consideration

For the first question, the ruling said documentary stamp tax and surtax were due on the deed when recorded. The consideration included both the amount paid for the option assignment and the unpaid balance paid for the fee deed.

An option alone was only an offer to enter a contract until accepted. But once assigned and exercised as part of the completed purchase, the full consideration for obtaining title was included in the tax base described by the Department.

The fee-parcel conveyance was taxable on its consideration

The deed from the ground lessor to the assignee transferred fee title. The ruling therefore imposed documentary stamp tax and surtax on the consideration given for that conveyance.

Lease termination also vested real property

The requester argued that ending a lease merely allowed the landlord's existing reversionary interest to ripen and did not convey anything taxable. The Department rejected that conclusion for this unusual lease.

The tenant had constructed and owned permanent improvements during the lease. When the termination document ended the lease, title to those improvements vested in the assignee as the new fee owner. Because the payment secured both surrender of possession and vesting of the real-property improvements, documentary stamp tax and surtax applied to the agreed termination consideration.

What this means for you

Ground-lease developers

Analyze the land, option rights, leasehold, and tenant-built improvements together. A termination payment can be taxable when ending the lease changes ownership of permanent improvements.

Buyers acquiring a fee parcel subject to a lease

The documentary-tax base may extend beyond the amount paid directly to the fee owner. An amount paid to acquire and exercise an option can be part of the full consideration for the deed.

Transaction and closing teams

Map every payment to the interest transferred: option rights, fee title, possessory rights, and improvements. Recording steps separately does not necessarily separate the consideration for tax purposes.

Common questions

Q: What consideration did the Department include for the deed?
A: The sum paid for the option assignment plus the remaining amount paid for the fee parcel.

Q: Was the direct conveyance from the ground lessor taxable?
A: Yes, based on the consideration given for the fee parcel.

Q: Why was the lease-termination payment taxable?
A: Ending the lease vested title to the tenant-built permanent improvements in the new fee owner.

Q: Did the Department accept the argument that lease termination never conveys real property?
A: No. It emphasized the atypical lease terms and the transfer of ownership in the improvements.

Q: Were the actual transaction amounts published?
A: No. The official ruling redacted them as "XX."

Citations and references

• Fla. Stat. § 201.02(1) — tax on deeds and instruments granting, assigning, transferring, conveying, or vesting real-property interests
• Fla. Stat. § 201.021 — surtax provision referenced in the ruling's three answers
• Fla. Admin. Code r. 12B-4.013(19) — option/contract-interest assignment analysis described by the petitioner
• Florida Attorney General Opinion 63-0116 (Sept. 25, 1963) — an option as an offer that becomes a contract or transfer when accepted

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 05B4-005

Original ruling text

SUMMARY
QUESTION 1: On what basis will documentary stamp tax and surtax be calculated with respect to the assignment by
Lessee to Assignee of Lessee’s option to purchase the fee title to the real property encumbered by the ground lease?
ANSWER 1 - Based on Facts Below: Documentary stamp tax and surtax required by s. 201.021, F.S., are due on
the deed upon recordation based on the consideration agreed to be paid. The consideration in this case is the sum
given for (a) the assignment and (b) the balance given for the deed.
QUESTION 2: On what basis will documentary stamp tax and surtax be calculated with respect to the conveyance of
the fee parcel from Ground Lessor to Assignee?
ANSWER 2 - Based on Facts Below: Documentary stamp tax and surtax required by s. 201.021, F.S., are due on
the conveyance of the fee parcel from Ground Lessor to Assignee based on the consideration given.
QUESTION 3: Will documentary stamp tax and/or surtax be payable upon any consideration paid by Assignee to
Lessor in connection with the termination of the ground lease?
ANSWER 3 - Based on Facts Below: Improvements constructed by the Lessee are permanent improvements to the
land, and constitute real property. The new owners take possession of the land and the improvements on it. The
document that terminates the ground lease vests title in the assignee lessor. Therefore, documentary stamp tax and
surtax required by s. 201.021, F.S., are due in connection with the termination of the ground lease based on the
consideration agreed to be paid.

July 21, 2005

Re: Technical Assistance Advisement No. 05B4-005
Documentary Stamp Tax
Assignment of Option to Purchase/Transfer of Fee Parcel
Termination of the Ground Lease
Section 201.02(1), F.S.
XXX (Lessee)
XXX (Ground Lessor)
XXX (Hotel)
XXX (Assignee)
Dear:
This is in response to your request for a Technical Assistance Advisement regarding the documentary stamp tax
issues involving assigning of an option to purchase, transferring a fee parcel, and subsequently termination of a

ground lease.
Facts as Presented by the Petitioner
Lessee is a domestic limited partnership and is the developer of a Hotel consisting of two hotel buildings and
ancillary improvements on the fee parcel which is leased pursuant to the Ground Lease. The Ground Lease is dated
XXX. The improvements were constructed by Lessee. Until expiration of the term of the Ground Lease, the Ground
Lease provides that Lessee owns the improvements. Upon expiration or earlier termination of the Ground Lease, title
to the improvements shall vest automatically in the owner of the fee parcel without necessity of any other instruments
of conveyance.
The Ground Lease provides for a term of 100 years. The Ground Lease grants an option to Lessee to purchase the
fee parcel at any time during the first 25 years of the term of the Ground Lease for a purchase price of $XX plus an
interest factor thereon. As of XX, the total fee parcel purchase price was $XX. The Ground Lease further provides that
Lessee is obligated to purchase the fee parcel at the end of said 25 year period for $XX plus an interest factor. The
failure to purchase the fee parcel at that time would result in a default and termination of the Ground Lease.
Lessee believes that the fair market value of the fee parcel, as encumbered by the Ground Lease, is $XX without
giving consideration to the improvements thereon which were owned by Lessee.
Lessee entered into a contract with Assignee for the assignment of the option by Lessee to Assignee. The parties
have determined the amount of $XX to be the consideration paid for the assignment, which amount is equal to the
difference between the fee parcel fair market value and the fee parcel purchase price.
Upon the assignment of the option by Lessee to Assignee and the exercise of the option by Assignee, Assignee
paid the fee parcel purchase price to the Ground Lessor, and the fee parcel was conveyed to Assignee subject to the
Ground Lease.
After acquiring the fee parcel, Lessee and Assignee entered into an agreement to terminate the Ground Lease and
all of Lessee's rights thereunder, which termination resulted in the loss to Lessee of (i) its possessory rights to the fee
parcel and the improvements, (ii) benefits to be derived by Lessee from the successful operation of the hotel on the
fee parcel, and (iii) its investment in the improvements and other personal property located on the fee parcel, costing
in excess of $XX. The consideration paid by the Assignee to Lessee in exchange for its agreement to terminate the
ground lease and to give up its possessory rights and its investment in the fee parcel and improvements was $XX.
It is the petitioner's understanding that pursuant to Rule 12B-4.013(19), F.A.C., an assignment to a new purchaser
of an interest under a contract or agreement for deed to real property is a conveyance of an equitable interest that the
assignor had in the real property and is subject to documentary stamp tax on the total consideration paid therefor. It is
the petitioner's understanding that the Department views an assignment of an option to purchase real property as an
assignment of an agreement for deed. Consideration for the transfer includes the amount paid by the new purchaser
and the unpaid balance of the contract.

In the current transaction, as described above, the parties determined the consideration for the assignment of the
option to be the assignment consideration. The consideration for the assignment of the option also includes the
unpaid balance of the contract which in the present transaction is the fee parcel purchase price. At the time of the
recording of the document assigning the option to Assignee, documentary stamp tax and surtax were paid on the
basis of the assignment consideration. At the time of the recording of the deed of the fee parcel, documentary stamp
tax and surtax were paid on the basis of the fee parcel purchase price.
The petitioner's review of Chapter 201, F.S., and Rule Chapter 12B-4, F.A.C., indicates that there is no express
provision imposing documentary stamp tax upon the termination of the ground lease.
Although s. 201.02, F.S., imposes documentary stamp tax "on deeds, instruments, or writings whereby any lands,
tenements, or other real property, or any interest therein, shall be granted, assigned, transferred, or otherwise
conveyed to, or vested in, the purchaser or any other person," the termination of the Ground Lease did not constitute
a grant, assignment, transfer, conveyance, or vesting of an interest in real property. You note that it has been held
under Florida case law that a landlord and tenant hold separate estates in demised premises during the term of a
lease; the tenant has a possessory interest, and the landlord has a reversionary interest. The landlord's reversionary
interest ripens into perfect title upon termination of the leasehold estate, but there is no conveyance of an interest in
real estate. Thus, based upon s. 201.02, F.S., and Florida case law, a landlord's reversionary interest in demised
premises is already vested in the landlord during the existence of the leasehold estate and is not conveyed to the
landlord. Therefore, a termination of a lease is not subject to taxation under s. 201.02, F.S., and, upon the termination
of the Ground Lease by Assignee and Lessee, no documentary stamp tax nor surtax was due as a result.
Closing with respect to the above referenced transactions has taken place, and it is the intent of the Lessee to be
sure that proper documentary stamp tax and surtax have been paid and that no additional tax is due.
Requested Ruling by the Petitioner
The Lessee requests a binding opinion on the following questions:

1. On what basis will documentary stamp tax and surtax be calculated with respect to the assignment by Lessee to
   Assignee of Lessee's option to purchase the fee title to the real property encumbered by the ground lease?
2. On what basis will documentary stamp tax and surtax be calculated with respect to the conveyance of the fee
   parcel from Ground Lessor to Assignee?
3. Will documentary stamp tax and/or surtax be payable based upon any consideration paid by Assignee to Lessor in
   connection with the termination of the ground lease?
   Law and Discussion
   Pursuant to s. 201.02(1), F.S., a tax is imposed on deeds, instruments, or writings whereby any lands, tenements,
   or other real property, or any interest therein, shall be granted, assigned, transferred, or otherwise conveyed to, or

vested in, the purchaser or any other person by his direction. The amount of the tax is $.70 on each $100.00 of
consideration paid therefor. When the full amount of the consideration for the execution, assignment, transfer, or
conveyance is not shown on the face of such deed, instrument, document, or writing, the tax shall be at the rate of
$.70 for each $100.00 or fractional part thereof of the consideration therefor. For purposes of this section,
consideration includes, but is not limited to, the money paid or agreed to be paid; the discharge of an obligation; and
the amount of any mortgage, purchase money mortgage lien, or other encumbrance, whether or not the underlying
indebtedness is assumed. If the consideration paid or given in exchange for real property or interest therein includes
property other than money, it is presumed that the consideration is equal to the fair market value of the real property
or interest therein.
According to AGO 63-0116, dated September 25, 1963, an option agreement or contract is an agreement or
contract by which the owner of property, real or personal, agrees with another person that the latter shall have the
right to buy the property therein described at a stated price within a specified or reasonable time and on agreed terms
and price. Such an agreement or contract consists of two elements: first, an offer to sell which does not become a
contract until accepted; and second, leaving the offer open for a specified time. Although such an option may fully set
out the consideration to be paid, its manner and time of payment and other things, such consideration, including the
time or times of its payment, as well as the option itself, does not become either a conveyance of an interest in the
property described therein or an agreement to pay the consideration mentioned unless and until accepted by the
purchaser. An option is but an offer to enter into a contact or agreement or to make a conveyance or transfer of
property, and it does not become a contract or agreement, or the transfer of an interest in property, until accepted by
the purchaser or optionee.
Conclusion
The subject Ground Lease is not a typical, everyday lease. The lessor holds fee simple title to the ground, and the
improvements are constructed by Lessee. Until expiration of the 100 years term, the Ground Lease provides that
Lessee owns the improvements. Upon expiration or earlier termination of the Ground Lease, the lease provides that
title to the improvements shall vest automatically in the Lessor without necessity of any other instrument of
conveyance. The Ground Lease further provides that Lessee is obligated to purchase the fee parcel at the end of a 25
year period. The failure to purchase the fee parcel at that time would result in a default and termination of the Ground
Lease.
Section 201.02(1), F.S., includes the phrases "any interest therein" and "vested in," which are "clear and express
words" for the taxation of documents conveying any interest in lands, legal or equitable. The taxes for the completed
transaction are to be computed based on the full consideration for the transaction: the assignment of the option to
purchase the fee title to the real property, conveyance of the fee parcel from ground Lessor to Assignee, and
consideration paid for the termination of the Ground Lease. Therefore your questions 1, 2, and 3 are answered as
follows:

1. Documentary stamp tax and surtax required by s. 201.021, F.S., are due on the deed upon recordation based on
   the consideration agreed to be paid. The consideration in this case is the sum given for (a) the assignment and (b) the
   balance given for the deed.

2. Documentary stamp tax and surtax required by s. 201.021, F.S., are due on the conveyance of the fee parcel from
Ground Lessor to Assignee based on the consideration given.

3. Improvements constructed by the Lessee are permanent improvements to the land, and constitute real property.
   The new owners take possession of the land and the improvements on it. The document that terminates the ground
   lease vests title in the assignee lessor. Therefore, documentary stamp tax and surtax required by s. 201.021, F.S., are
   due in connection with the termination of the ground lease based on the consideration agreed to be paid.
   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 interpretation 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, 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 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,
   Baldan E. Sulker
   Senior Tax Specialist
   Technical Assistance & Dispute Resolution
   BES/mh