Despite the withdrawal of a proposed rule on the taxability of ground leases, a series of recent press interviews with the Department of Revenue Administration’s commissioner might have added to the controversy as to when such leases are subject to New Hampshire’s Real Estate Transfer Tax.
While maintaining a long-standing rule that a lease has to have a term of at least 99 years to be subject to RETT,1 the DRA proposed a new regulation in January stating that assignments of ground leases were taxable if they had a duration of 30 years or more.2 Some real estate professionals and politicians quickly seized on what they saw as a major change in the Department’s interpretation of the law.
Once the controversy became public, the DRA promptly withdrew the proposed rule. In recent days, DRA Commissioner John Beardmore has been quoted in the press as saying that the rule had been “poorly constructed.”
An article in Sunday’s Nashua Telegraph said that, “Beardmore had the rule change withdrawn, reportedly because it actually didn’t go far enough to enforce the taxation of ground leases that already were being taxed.”3 The article also stated that the DRA had determined ground leases were taxable under the current definition of the tax “some time ago” and that the proposed rule “was merely meant to clarify and update the language the agency was already enforcing.”
And the Concord Monitor reported yesterday that, “Beardmore said he didn’t have numbers on how much is actually collected from the tax, but he did say no one has ever challenged it.”4
An article in today’s Union Leader said that Beardmore “believed the rule could be interpreted to apply only to transfers of ground leases and not original leases.”5 The article went on to quote Beardmore directly as saying, “[t]hat’s exactly what we meant by ‘poorly constructed’. And it’s why we withdrew those specific provisions of the rule.”
Still Not Clear When a Ground Lease Becomes Taxable
From some of the comments attributed to Beardmore, it’s not clear whether the Department considers that ground leases are taxable only if they are for a minimum of 99 years or that all leases of real estate are taxable, regardless of how long they run. The latter interpretation, however, seems unlikely because the DRA did not drop the existing regulation stating that a real estate lease is subject to tax only if it has a minimum term of at least 99 years.6 In light of the report that Beardmore withdrew the 30-year rule “because it actually didn’t go far enough to enforce the taxation of ground leases that were already being taxed”, clarification will almost certainly be needed before the controversy can be put to rest.
Today’s Union Leader article reported that the DRA plans to meet with “real estate professionals to come up with a clearer definition of ground leases.” Beardmore also reportedly said that his department “has no timeline to bring a proposal on taxes on ground lease transfers to the Legislature.”
As to the Commissioner’s statement that “no one has ever challenged” the Department’s enforcement of the 30-year minimum for ground leases, an Internet search and a review of court filings turned up nothing indicating that the DRA has ever advanced that interpretation publicly. While it’s possible that the Department has advised some taxpayers of such a position, it would seem surprising if a taxpayer who was audited over the issue would have not pursued it in court, especially considering the apparent conflict with the existing 99-year rule.
Ground Leases a Subset of Real Estate Leases
The DRA has apparently not explained the reasons behind its initial decision to carve out a special rule for ground leases, especially in light of the fact that they are nothing more than a subset of real estate leases in general (which are already covered by the 99-year rule). There is no provision in either the NH statutes covering the conveyance of real estate or the common law stating that a lease of 99 years should be treated any differently from a lease of shorter duration.
Transfers of NH real estate are subject to tax. RSA 78-B:1, I(a) states that RETT “…is imposed upon the sale, granting and transfer of real estate and any interest therein including transfers by operation of law. Each sale, grant and transfer of real estate, and each sale, grant and transfer of an interest in real estate shall be presumed taxable unless it is specifically exempt from taxation under RSA 78-B:2.” (Emphasis added)
Under NH law, a building on leased property is considered real estate. RSA 477:44 states that, “[b]uildings situated on land not belonging to the owners of the building shall be deemed real estate for purposes of transfer, whether voluntary or involuntary, and shall be conveyed, mortgaged or leased, and shall be subjected to attachment, other liens, foreclosure and execution, in the same manner and with the same formality as real estate.”
When a building is erected on “on land not belong to the owners of the building” it is almost always done on property covered by a ground lease. A ground lease has been defined as:
A long-term (usu. 99-year) lease of land only. Such a lease typically involves commercial property and any improvements built by the lessee usu. revert to the lessor.7
A ground lease, just like any other lease of real estate, confers an interest in real estate. The term ‘interest in real estate’ has been defined (in relevant part) as:
Collectively, the word includes any aggregation of rights, privileges, powers and immunities; distributively, it refers to any one right, privilege, power, or immunity.
Interest in the use and enjoyment of land. The pleasure, comfort, and advantage that a person may derive from the occupany of land. The term includes not only the interests that a person may have for residential, agricultural, commercial, industrial, and other purposes, but also interests in having the present-use value of the land unimpaired by changes in its physical condition.8
Legislative Review of Proposed Rules
Even though the DRA has withdrawn the rule on 30-year ground leases, it’s very possible the legislative committee responsible for reviewing agency regulations will press the Department to provide more guidance on the issue at its meeting scheduled for Aug. 21st. 9
There are at least three other rules that could also prove controversial which the Department has not yet had a chance to discuss with the committee. See Proposed Rewrite of RETT Rules Not Always Consistent with Statutes and Proposed Rule Lowers RETT on Entity Conversions to Statutory Minimum.
- Rev. 802.01(f) The lease of real estate based on the fair market value of the leased property when the term of the lease is: (1) For a period of 99 years or more; or (2) For a period of less than 99 years and renewal rights could extend the total period of time to 99 years or more ↩
- Proposed Rev. 802.01(j) The transfer of a lessee interest in a ground lease including any interest of the lessee in the related improvements that provides for a term of 30 or more years when all options to renew or extend are included, whether or not any portion of the term has expired. ↩
- ‘Hidden’ Real Estate Tax; Fodder for Frontal Election-Year Assault, 7/27/14 ↩
- Republicans, Democrats Mark Battleground in Race to Control State Senate, 7/27/14 ↩
- Real Estate Transfer Tax Proposal Pulled Off Table, 7/28/14 ↩
- And the political fallout from an interpretation that the lease of an apartment for a year or two would be significant, to say the least. ↩
- Black’s Law (8th Edition) ↩
- Black’s Law (8th Edition) ↩
- When the DRA appeared before the committee earlier this month to present its final version of the proposed rewrite of all RETT regulations, it ran into problems with another rule and was told to return once it had more complete information on the issue. That rule dealt dealt with the definition of a term that had undergone a statutory change five years earlier. Even though the DRA never modified its existing regulation defining the term, when it finally did, the proposed rule was unchanged from the previous definition. (See Legislature Tells DRA to Provide Background on Controversial RETT Rule) Considering how long the DRA went before working on that rule, the Committee might request quicker action on an interpretation of the more controversial issue of the taxability of real estate leases. ↩