Does a convention center that a developer conveys to a city's local government corporation only in a reversible 'determinable fee' qualify as municipally owned, so the project earns Texas 'qualified hotel project' tax rebates?

Note: This ruling is also indexed on STAR as a sales-tax document under accession 202001025L; the text is the same ruling.

Plain-English summary

A developer planned a large mixed-use hotel-and-convention-center project (adaptive reuse of a historic downtown site) and wanted it treated as a "qualified hotel project" under Government Code § 2303.003(8), which unlocks state tax rebates under Tax Code § 151.429(h). A qualified hotel project must include a convention center owned by the municipality (here, a city of 1,500,000 or more).

The proposed structure: the developer would build the ~35,000 sq. ft. convention center unit at its own cost, then convey it to the city's local government corporation (CFC) — but only in a "determinable fee" that could revert to the developer about ten years and one day after the hotel opens (extendable another ten years if a second hotel is built). Title would also be encumbered by an existing mortgagee's deed-of-trust lien.

The ruling (Question One): No — the convention center unit does not satisfy the municipal-ownership requirement. Unlike fee simple, a determinable fee that can revert leaves the city without the freedom to dispose of the property at will, and the title is encumbered. So the city would not truly "own" it under § 2303.003(8).

Because a qualified hotel project only exists if the convention-center ownership requirement is met, the project is not a qualified hotel project — and the Comptroller declined to answer all the remaining questions about the rebates.

What this means for you

Developers and cities structuring hotel/convention-center deals

The form of the municipality's ownership is decisive for the § 151.429(h) rebates. A determinable/defeasible fee with a reversion to the developer, or encumbered title, will not meet the "owned by a municipality" test — the city needs ownership it can dispose of at will (i.e., fee simple, unencumbered). If the ownership prong fails, none of the downstream rebate questions even get reached.

Practical takeaway

If you're relying on qualified-hotel-project rebates, structure the convention-center conveyance as genuine municipal ownership before applying — a reversionary interest kept by the developer defeats eligibility.

Common questions

Q: Why didn't the convention center qualify?
A: The developer would convey it to the city corporation only in a determinable fee that could revert to the developer, and the title was encumbered by a lien. That's not the municipal ownership § 2303.003(8) requires, because the city couldn't freely dispose of the property.

Q: What rebates were at stake?
A: Tax rebates for a "qualified hotel project" under Tax Code § 151.429(h). Because the project didn't qualify, the Comptroller didn't reach those questions.

Q: Did the developer plan to get local tax rebates too?
A: No. The facts state no rebate of ad valorem, local sales/use, local hotel occupancy, or local mixed beverage taxes was contemplated.

Q: Can another developer rely on this ruling?
A: No. A Texas private letter ruling binds the Comptroller only as to the requesting taxpayer and its specific facts and cannot be relied on by anyone else.

Citations and references

• Tex. Gov't Code § 2303.003(8) — defines "qualified hotel project," including the requirement that the convention center be owned by a municipality of 1,500,000 or more; the ownership test the project failed.
• Tex. Tax Code § 151.429(h) — the tax rebates available to a qualified hotel project.
• 34 Tex. Admin. Code Rules 3.1 and 3.10 — authority for the private letter ruling and detrimental-reliance relief.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=HOT
• Opinion: https://star.comptroller.texas.gov/view/202001026L

Original ruling text

Note: This document is also indexed as a sales tax document under STAR 202001025L.

January 28, 2020

RE: Private Letter Ruling No. PLR 20190403104404

**, Taxpayer No. ***

Dear **:

We issue this private letter ruling in accordance with Rule 3.1, Private Letter Rulings and General Information Letters.[ENDNOTE: (1)] We are responding to your request dated March 29, 2019, and supplemental correspondence on April 25, 2019. Detrimental reliance relief is provided in accordance with Rule 3.10, Taxpayer Bill of Rights.

You requested guidance on the proposed development and construction of a municipal hotel and convention center project.

Facts Presented

** is a proposed mixed-use development to be located on a 16-acre parcel of land at ** in downtown CITY (Project). The Project focuses on the adaptive reuse and reinvention of the historic COMPANY site. The Project is currently owned by ** (Taxpayer) and affiliates (Developer). The Developer is requesting that the CITY Council adopt an ordinance through which the CITY would select Developer to construct a qualified hotel project within the meaning of Texas Government Code Section 2303.003(8) and receive tax rebates under Section 151.429(h).

CITY First Corporation (CFC) is a local government corporation created by and acting on behalf of the CITY, organized pursuant to Subchapter D of Chapter 431 of the Texas Transportation Corporation Act. It is contemplated that Developer would create a condominium for the Project consisting of several units, one of which would be a convention center facility of approximately 35,000 square feet (Convention Center Unit).

Upon completion of construction of the Convention Center Unit by the Developer at its cost and expense, the Developer would convey the Convention Center Unit to CFC in determinable fee, which could revert to Developer ten years and one day after the hotel opening. Such period could be extended an additional ten years if a second hotel is constructed as part of a future phase of the Project. The conveyance by Developer to CFC would be subject to certain exceptions to title, including an existing deed of trust lien by a mortgagee granted by Developer. The application for benefits would be submitted to the Comptroller after that conveyance occurred.

CFC would, in turn, lease the Convention Center Unit back to Developer (or an affiliate of Developer) for a term coterminous with the determinable fee. The Convention Center Unit would be managed for CFC under a development and management agreement with an affiliate of Developer and under which the Developer would be obligated to pay all costs to operate, repair, and maintain the Convention Center Unit. No rebate of ad valorem taxes, local sales and use taxes, local hotel occupancy taxes, or local mixed beverage taxes is contemplated.

Another condominium unit of the Project would be a hotel containing approximately 90- 200 rooms, which would be constructed and owned by Developer, and privately operated and managed (New Hotel). Other condominium units of the Project may include an international food hall area (approximately 40,000 sq. ft.), restaurant and patio space (approximately 30,000 sq. ft.), a feature roof-top restaurant (15,000 sq. ft.), a concert venue (50,000+ sq. ft.), retail (approximately 20,000 sq. ft.), and a roof-top farm (80,000+ sq. ft.) (Other Condo Units). The New Hotel and the Other Condo Units would all be within 1,000 feet of the Convention Center Unit, and could include restaurants, retail, entertainment uses, and potentially a second hotel.

Questions, Rulings, and Analysis

Our restatement of your questions is shown below, followed by our responses and analysis.

Question One: Assuming the CITY Council adopts the contemplated ordinance, does the Convention Center Unit qualify as a “convention center owned by a municipality having a population of 1,500,000 or more” pursuant to the definition of “qualified hotel project” set forth in Texas Government Code Section 2303.003(8)?

Ruling One: No, the Convention Center Unit does not qualify as convention center owned by a municipality having a population of 1,500,000 or more as set forth in Texas Government Code Section 2303.003(8).

Analysis for Ruling One: The Developer owns the Project site and would own the Convention Center Unit. The Developer would convey the Convention Center Unit to CFC in determinable fee. This determinable fee could revert to Developer ten years and one day after the hotel opening and could be extended an additional ten years. Unlike with fee simple, the municipality would not have the freedom to dispose of the Convention Center Unit at will and title to the Convention Center will be encumbered. Therefore, the Convention Center Unit will not satisfy the ownership requirement in Texas Government Code Section 2303.003(8) of being owned by a municipality having a population of 1,500,000 or more under the proposed arrangement. A qualified hotel project only exists if the convention center ownership requirement is satisfied.

The Comptroller declines to answer all remaining questions in the request because the Project is not a qualified hotel project as set forth in Texas Government Code Section 2303.003(8).

The Texas Tax Code and Texas Administrative Code are accessible at www.comptroller.texas.gov/taxes/.

If you have questions about this private letter ruling, please email us through our website at https://comptroller.texas.gov/web-forms/tax-help/ and reference Private Letter Ruling No. 20190403104404.

Sincerely,

Tax Policy Division – Indirect Taxes

Texas Comptroller of Public Accounts

ENDNOTE:

1. Unless otherwise indicated, all references to “Section” are to the Texas Tax Code, and all references to “Rule” are to Title 34 of the Texas Administrative Code.