How did Florida treat a county's lease, sublease, and leaseback of public facilities for sales, intangible, stamp, and property tax?

Plain-English summary

Florida found no sales tax due on payments under the described three-step county facilities transaction. The county leased real and, at some locations, tangible personal property to a private owner trust; that trust subleased the facilities to a county-created trust; and the county-created trust sub-subleased them back to the county, which remained in possession and continued operating them for governmental or public purposes.

The owner trust and county-created trust qualified for resale treatment because each leased the property onward. The county's payments under the final sub-sublease were exempt government purchases paid directly to the selling dealer.

The ruling also addressed other taxes. The governmental leasehold estate was exempt from intangible tax because only the county could operate the facilities for a public purpose, and other transaction intangibles avoided tax so long as ownership, management, and control remained outside Florida. The refundable unearned prepaid rent did not create documentary stamp tax under the cited provisions. If the fixed purchase option was exercised, however, the purchase consideration would be subject to documentary stamp tax.

The Department did not make the final ad valorem property-tax decision. It said the county property appraiser had primary authority to decide whether the municipal property qualified for exemption based on governmental or public use.

Common questions

Why were the first two lease payments not subject to sales tax? Each lessee was a registered dealer leasing the property onward for resale.

Why were the county's sub-sublease payments exempt? The county paid the dealer directly and continued using the facilities for governmental or public purposes.

Did the TAA conclusively grant a property-tax exemption? No. It left that factual determination to the county property appraiser.

Would exercising the purchase option create stamp tax? Yes. The ruling distinguished the option arrangement from consideration paid if the fixed purchase option was actually exercised.

Citations and references

• Fla. Stat. §§ 212.02(14)(a), 212.031, and 212.08(6)
• Fla. Admin. Code rr. 12A-1.038 and 12A-1.070(9)
• Fla. Stat. §§ 196.012(6) and 196.199(2)
• Fla. Stat. §§ 201.02(1), 201.08, and 213.22

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 98A-090

Original ruling text

SUMMARY

Sales tax is not imposed on any payments made by any of the
parties to the following transaction: a lease of
municipally owned real property and tangible personal
property when first leased by the municipality to a private
business trust which is a registered dealer and which
tenders a resale certificate to the municipality; a
sublease of the same property to a second trust which is
created by the municipality; and the sub-sublease of the
property back to the municipality for continued use for
governmental or public purposes.

Dec 11, 1998

Re: Technical Assistance Advisement 98A-090
Lease, Sublease and Sub-sublease of County Owned Property
Sections 196.012(6), 196.199(2), 201.02(1), 201.08,
212.02(14)(a), 212.031(1)(c), (2)(b), 212.06, 212.08(6),
F.S.
Rules 12A-1.038, 12A-1.070(9), F.A.C.
XXX (herein County, or alternatively, Headlessor or SubSublessee)
XXX owned bus and rail maintenance facilities, and parking
garages (herein Facilities)
XXX (herein Investor I), and XXX (herein Investor II,
collectively herein Investor)
XXX ( herein Owner Trust, or alternatively Trustee or
Headlessee)
XXX (XX) Limited (herein Lender)
XXX (herein XX, or alternatively Sublessee/Sub-Sublessor)
XXX (XX) Limited (herein Payment Agreement Issuer)
XXX (herein Payment Agreement Guarantor)
XXX (herein Letter of Credit Issuer)
XXX (herein Letter of Credit Guarantor)
XXX (herein Surety Provider)

Dear :

This is a response, styled a Technical Assistance Advisement, to
your letter dated XX, wherein you asked whether, as to solely
the real property in some instances, and the real property and
tangible personal property in the remaining instances, which
comprise the Facilities owned and operated by the County, a
lease, sublease, and sub-sublease of such property to various
entities will create, as to any such entities, a liability for
Florida sales tax, ad valorem property tax, intangible tax, or
documentary stamp tax. You have provided the Department with
documentation of the transactions, which include a copy of a
memorandum sent to the Federal Transit Administration (herein
Memorandum), and copies of other contracts including the
Participation Agreement, with Appendix A; Head Lease; Sublease;
Loan and Security Agreement; Equity Letter of Credit; and, the
Insurance and Indemnity Agreement.

Note is made that there are 6 locations of the Facilities, each
of which is subject separately to all the same documentation
herein. Further, as to some of the Facilities, solely real
property is subject to the lease/leaseback provisions, while in
the remaining Facilities, both real property and tangible
personal property are subject to the lease/leaseback. In all
instances, the County will remain in possession of the
Facilities and will continue to operate the Facilities solely
for governmental or public purposes.

In some of the 6 separate transactions the Owner Trust, in all
instances a Delaware business trust, will be formed by Investor
I. In the remainder of the instances, Owner Trust will be formed
by Investor II. In all instances either Investor I or Investor
II will be the sole beneficiary of the Owner Trust. Irrespective
that two different equity investors will be the beneficial
owners of their respective Owner Trusts, all documentation
described in the following discussion will be identical.
Hereafter Investor I and Investor II will be identified as
Investor.

The representative transaction applicable to all of the
Facilities is described as follows:

Lease Agreements

County, as the owner of the Facilities, seeks to lease
Facilities to Owner Trust, which then will simultaneously
sublease Facilities to SPE, a Florida trust formed pursuant to
provisions of Chapter 609, F.S., the settlor and sole
beneficiary of which is the County. The SPE, in turn, shall subsublease the Facilities back to the County. The Facilities will
be leased by the County to Owner Trust pursuant to Section 2 of
the Headlease and the Participation Agreement, the term of which
is to be 49 years.

Owner Trust, as described by you, is a business trust organized
under the laws of Delaware. The Department was not provided
with a copy of the Trust Agreement creating the Owner Trust.
Simultaneously with the execution of the Head Lease, Owner Trust
will sublease the Facilities to the SPE, pursuant to the
Sublease, for an initial term of 21 years (herein Initial
SubLease Term) with an option to renew for a term of 18 years
(herein the SubLease Renewal Term). The SPE will simultaneously
sub-sublease the Facilities pursuant to the Sub-Sublease, to the
County.

As noted above, there are 6 separate transactions involved in
the lease and leaseback of the Facilities. All of the
transactions are identical as to form. However, the
transactions did differ as to dollar amounts and length of
terms. The references to lease terms are intended to be
indicative of the 6 lease transactions.

Merger

Prior to the expiration of the Initial SubLease Term, the SPE
may elect under provisions of the Fixed Purchase Option as
described in Section 20 of the Sublease and in Section 12F of
the Participation Agreement, to acquire the Owner Trust by a
statutory merger. If this election is made, the County will
assume, in addition to its beneficial interest in the SPE, the
interest of the Owner Trust. In such an event the County will be
the Headlessee, the Sublessee, as well as the Headlessor.

Should the SPE not elect to execute the Fixed Purchase Option,
the Owner Trust, as you state on page 5 of your letter, may do
the following:

either (i) permit the Sublease to expire, in which case the
Owner Trust, as Head Lessee under the Head Lease, will
retain (for itself or it[s] assigns) possession of the
[Facilities] for the remainder of the Head Lease Term, or
(ii) cause the SPE to continue the Sublease for the
SubLease Renewal Term, in which event the SPE will be
obligated to make annual rental payments thereunder (in
amounts more particularly described in the... Memorandum
and exhibits) for the balance of the Sublease Term, without
any further options to purchase the Owner Trust's rights
under the Head Lease. In the event the Sublease is extended
for the Sublease Renewal Term, the Sub-Sublease will be
similarly extended.

Payments and Financing

Owner Trusts are to receive, in total, approximately $127
million of which $88.7 million is to be provided pursuant to a
limited recourse loan from Lender, and the remainder, in the
amount of $38.3 million, is tendered by Investor.

Under the Headlease the Owner Trusts, in total, will pay, at
closing, $127 million to the County as a rent prepayment.
County will retain an undisclosed amount for its own public
purposes. The County will transfer, as a contribution, to the
SPE the sum of $88.7, which is the principal amount of the
Lender's loan, to the Payment Agreement Issuer in accordance
with the Payment Agreement which is executed by the SPE, the
Owner Trust, and the Payment Agreement Issuer.

The Payment Agreement is guaranteed by the Payment Agreement
Guarantor to the favor of the SPE. The payment made by the
Payment Agreement Issuer to the Owner Trust, on behalf of the
SPE pursuant to the Sublease, is that amount needed to liquidate
the debt owed to Lender. The amount of the rent paid by SPE to
the Owner Trust will be slightly less than the amount paid by
County to SPE. Both of such individual rent payments will be

less than the rent paid by the Owner Trust to the County. Owner
Trust is to receive the principal benefits from this
transaction.

The SPE will transfer the remainder of the contribution received
from County, in the amount of $38.3 million, to the Equity
Letter of Credit Issuer in accordance with the Equity Letter of
Credit. The Equity Letter of Credit, which is guaranteed by the
Equity Letter of Credit Guarantor, is issued in favor of the
Owner Trust for the account of the SPE. The SPE will grant a
surety interest in the Equity Letter of Credit to the Owner
Trust.

Note is made that the amount represented by the Equity Letter of
Credit will be the source of the funds needed to be paid to the
Investor at the time of the merger of the Owner Trust and the
SPE, if such merger is elected by the SPE. If the SPE elects not
to exercise the Fixed Option Purchase the funds represented by
the Equity Letter of Credit will be returned to the SPE, as
provided in the Headlease section 15(e), in which event the
County will be required to substitue alternative collateral if
the Sublease is extended.

If the Headlease is terminated anterior to the expiration date,
the Investor would receive a refund of the amount of prepaid
rent, as provided in section 15(e) of the Headlease, applicable
to any remaining term of the Headlease. On page 7 of your
letter, you describe as follows, the events which would cause
the early termination of the Headlease:

(i) a default by the County of its obligations under the
Head Lease, (ii) a default by the SPE of its obligations
under the Sublease, or by the County of its obligations
under the Sub-Sublease, (iii) the passage of a
law/regulation that would prohibit the County or its SPE
from continued participation in the transaction, or (iv) a
casualty event rendering the subject property unusable,
followed by a determination not to rebuild or repair the
property.

The loan made by the Lender will be executed and delivered

outside of Florida. You state as well that no Florida real
property will be mortgaged to secure the loan made by Lender.
The Lender will not be incorporated nor domiciled in Florida.
The Equity Letter of Credit Issuer will not be incorporated or
domiciled in Florida.

Sales Tax - Department Response

Sales tax may not be imposed on any payment made pursuant to the
planned Headlease, Sublease, or the Sub-Sublease, as these
agreements have been described in your letter and in the
documents identified above which you have provided the
Department.

As to the Sub-Sublease, s. 212.08(6), F.S., exempts from the tax
any payments made by certain enumerated governmental entities,
including a county of the state, when pursuant to a sale such
payment is made directly to the selling dealer. The
administrative rule which interprets the statute, is Rule 12A1.001(9)(a), Florida Administrative Code.

Considering the instant facts, the payments pursuant to the SubSublease are to be made directly by the County to the SPE. As a
consequence, these payments, whether in consideration of the
tangible personal property or real property, are exempt under s.
212.08(6), Florida Statutes.

As to the Headlease and Sublease of the Facilities' tangible
personal property, the leases of such property in accordance
with the Headlease and Sublease are exempt pursuant to resale
provisions as expressed in s. 212.02(14)(a), Florida Statutes.
This statute provides that a sale of tangible personal property
or a service which is taxable is considered as a "retail sale"
except when such sale is made for resale. Rule 12A-1.038,
F.A.C., interprets the statute.

Thus, when the tangible personal property of the Facilities is
leased, in accordance with the Headlease to Owner Trust, and
subsequently leased to the SPE pursuant to the Sublease, none of
the payments tendered by either the Owner Trust or the SPE are
payments subject to sales tax because each of the payments is

made for further resale. Section 212.02(14)(a), F.S., excludes
such payments from the tax.

As to the Headlease, and the Sublease of the Facilities' real
property, s. 212.031(1)(c), F.S., imposes sales tax on the total
rent or license fee given for the right to use or occupy real
property. Rule 12A-1.070, F.A.C., interprets s. 212.031, F.S.,
and in subsection (9) of the administrative rule a provision
allows the tender of a resale certificate by a subtenant or
assignee in the instance of a lessee which sublets or assigns
all of the real property, or when such lessee retains only an
incidental portion of the real property under sublease or
assignment.

In sum, no payments made by the Owner Trust, SPE, or the County,
under the provisions of the Headlease, Sublease, or the SubSublease as such documents have been provided to the Department
are subject to sales tax.

Intangible Tax - Department Response

Under the provisions of the Headlease, Section 8, the only
purpose allowed the Head Lessee is the sublease, and subsublease of the Facilities. The Sublease, in Section 8(b),
provides the only use of the Facility by the Sublessee is the
sub-sublease of the Facility. Consequently, only the Subsublessee (which is the County) may operate the Facilities, and
such operation is in furtherance of a governmental or public
purpose. Therefore, the lease of the Facilities to Trust would
be exempt from intangible tax on governmental leasehold estates.
No intangible tax will arise with respect to any of the
intangible property acquired by, or arising out of, this
transaction so long as the ownership, management, and control is
outside of the State of Florida.

Documentary Stamp Tax - Department Response

The prepaid rent under the Headlease will not be subject to
documentary stamp tax under s. 201.02(1), F.S., since section
15(e) of the Headlease provides that the unearned portion of the
prepaid rent must be refunded to the Headlessee. The Headlessor

may terminate for any of the reasons described in Section 14
under the legend "Lease Events of Default." In Section 15, the
remedies which the County enjoys are set forth in the event of
default.

Section 10 of the Headlease describes the rights of the
Headlessee in the event of the default by the County . Section
10(i) provides that in the event of the loss or destruction of
the property the Headlessee may:

terminate this Lease and pay or cause to be paid, on a
Termination Date not later than 180 days after the
occurance of such Event of Loss (a "Loss Payment Date") to
the [County], to the extent not theretofore paid as
insurance proceeds, (A) the Lease termination Value
computed as of the Payment Date, plus (B) any unpaid Lease
Basic Rent due before the Loss Payment Date, plus (C) all
amounts of Lease Supplemental Rent (including Lease
Supplemental Rent attributable to the [Headlessee's]
exercise of its rights under this section) due and owing on
the Loss Payment Date....

Thus, in reviewing these provisions, a determination is made
that this transaction contains an adequate provision for the
return of any unearned portion of the prepaid rent made by the
Owner Trust. Therefore, it can be construed that the Owner Trust
is not purchasing an interest in real property for a definite
period of time, since it is conditioned upon a future event.
None of the lease transactions are subject to the documentary
stamp under s. 201.08, Florida Statutes.

Any consideration paid for the Fixed Purchase Option would be
subject to documentary stamp tax under s. 201.02(1), F.S., if
the option is exercised. Consideration paid in connection with
the Fixed Purchase Option as provided in Section 20 of the
Sublease and in Section 12F of the Participation Agreement would
not be subject to documentary stamp tax.

Ad Valorem Tax - Department Response

Under current law, the county property appraisers, and not the

Department of Revenue, have the authority and responsibility to
determine whether property is entitled to an exemption from
property tax. Municipal property leased to a nongovernmental
lessee may be exempt from ad valorem taxation if used for a
governmental or public purpose. See, s. 196.199, Florida
Statutes. See, for example, Capital City Country Club v. Tucker,
613 So.2d 448 (Fla. 1993). The primary jurisdiction for making
these factual determinations lies with the county property
appraiser, upon a proper application for exemption made
consistent with s. 196.011, Florida Statutes.

The 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. The technical opinion as to ad
valorem property taxation is not binding on the Department as
the implementation of this tax is in the province of the office
of the county property appraiser.

You are further advised that this response and your request are
public records under Chapter 119, FS, which are subject to
disclosure to the public under the conditions of s. 213.22, FS.
Your name, address, and any other details which might lead to
identification of the taxpayer must be deleted by the Department
before disclosure. In an effort to protect the confidentiality
of such information, we request you notify the undersigned in
writing within 15 days of any deletions you wish made to the
request or the response.

Sincerely,

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

Joe Parramore
Tax Law Specialist
Intangible Tax
Technical Assistance and Dispute Resolution

Joy Eldred
Tax Law Specialist
Documentary Stamp Tax
Technical Assistance and Dispute Resolution

John Felton
Tax Law Specialist
Ad Valorem Property Tax
Technical Assistance and Dispute Resolution

Ctrl No. 35954