Term Of Renewal Period Not Included When Assessing Realty Transfer Tax To Ground Leases

In this appeal from a determination of the Pennsylvania Board of Finance and Revenue (the “Board”), the Commonwealth Court was asked to interpret the Tax Code and decide whether lease renewal periods are to be considered when determining whether a ground lease is subject to the realty transfer tax. In concluding that renewal periods are not to be included, the Court reversed the determination of the Board and ordered a refund of the taxpayers’ money.

Saturday Family owns property that it leased to Techspec for a period of 29 years and 11 months (“Taxpayers”). Pursuant to the Ground Lease, Techspec had a renewal option for up to 6 periods of 5 years each, at fair market rent to be determined at the time of extension. A method for determining fair market rent was provided in the Lease in case the parties could not agree upon an amount. Taxpayers recorded a Memorandum of Ground Lease and filed a Realty Transfer Tax Statement of Value that claimed an exemption from realty transfer tax. The Department of Revenue issued a Realty Transfer Tax Notice of Determination, assessing $12,455.23 on the Lease. The notice listed the reason for the assessment as: “Lease exceeds 30 years with a formula in place referred to in #8 of memorandum of ground lease.” Taxpayers paid the tax in full, but filed a refund petition with the Board.  The Board denied the appeal on the basis that the initial term of the Lease and renewals set a term in excess of thirty years, thereby making the Lease a taxable document. Taxpayers appealed.

On appeal, the Commonwealth Court reversed the Board’s order. Interpreting § 1102-C.3 of the Tax Code, the Court concluded that the term of a renewal period under a Ground Lease should not be included in the total term of the lease for Realty Transfer Tax purposes, where the Ground Lease expressly provides that the rental charge for a renewal period is fair market value at the time of renewal. The mere fact that the Ground Lease establishes a mechanism for determining fair market value rent, the Court concluded, did not change this fact.

Click here to read: Saturday Family LP v. Com., 781 and 782 FR 2013 (Pa. Commw. Ct. Oct. 17, 2016).

Edited by:

Zac Sivertsen