Another Twist in Purchasing a Florida Hotel Property: New Notification Requirements After a Change of Ownership or Control
Purchase and sale transactions are generally structured in one of two ways: most frequently, as an asset sale, where there is a direct transfer of ownership of the property, or as an entity sale, where there is a change of ownership or control, direct or indirect, of the property owning entity. In the state of Florida, one of the factors that was a consideration for determining the structure of the transaction was the objective of keeping the purchase price between the parties confidential. Another factor was Florida’s real property transfer tax. Before 2008, if the transaction was structured as an entity sale, disclosure of the transaction and purchase price to the local property appraiser was not required and no documentary stamp tax was due. In order to get asset sale treatment for federal income tax purposes, but using an entity sale for state law purposes, one structure had the seller form a single member limited liability company prior to the sale, contribute the target assets to it and then sell the membership interest to the buyer. Early in 2008 the Florida Legislature added another twist to structuring the purchase and sale of hotel properties in Florida because these changes in ownership of entity transactions now generate disclosure requirements and potential penalties that may be applicable if the property owner fails to comply.
Ambiguous Reporting Requirements
The Florida Legislature proposed property tax reform changes to the Florida Constitution in 2007 (the “Constitutional Amendments”) because of public dismay over increasingly burdensome property taxes. These Amendments were approved by the voters in early 2008 and include a limitation on the amount an assessment can increase annually, and also include the addition of a provision, to be implemented by general law, that requires a just valuation assessment after a change of ownership or control.
The Florida Legislature enacted, and the governor signed, Chapter 2008-173, Laws of Florida (the “Act”), which now imposes a reporting requirement upon a change of ownership or control of property and the legal entity that owns Florida real property. The statutory language is ambiguous and an explanation of all the changes and nuances is beyond the scope of this alert. Internal reorganizations also appear to require reporting even though ownership or control of the property has not changed.
The Florida Department of Revenue is required to promulgate rules to implement the statutory provisions and issued a proposed form for reporting changes in ownership of non-homestead property. If the property owner fails to report any required change of ownership or control to the property appraiser significant penalties can apply. For example, if the property appraiser determines for any year, within the prior 10 years but with 2008 as the floor, that an unreported change of control occurred and the owner’s property therefore was not entitled to a 10 percent limit on property tax assessment increases, then the owner of the property is subject to the taxes avoided plus interest at 15 percent per annum, and a penalty of 50 percent of the taxes avoided. The Act applies to the 2008 and subsequent tax rolls. The Constitutional Amendments provide that the 10 percent limit on increases is effective beginning with the 2009 assessment year.
Defining a Change in Ownership
The notification requirement (Section 193.1551) applies to any person or entity that owns property assessed under Section 193.1554 (residential real property with nine units or less and certain other residential property) or Section 193.1555 (non-residential real property and certain other residential real property, excluding homestead property, but including hotels) where there is a change of ownership or control. A change of ownership or control is defined in Section 193.1555 (Section 193.1554 has a similar but separate definition) to mean any “sale, foreclosure, transfer of legal title or beneficial title in equity to any person, or the cumulative transfer or control or of more than 50 percent of the ownership of the legal entity that owned the property when it was most recently assessed at just value” provided, however, that there is no change of ownership if the transfer of title is to correct an error or the transfer is between the legal and equitable title.
One issue that is not clear is whether a change in ownership of the parent of a second tier or lower Florida property-owning subsidiary results in the property-owning entity being required to send a notice. In any case, if the reporting requirement applies, the notice must be “prompt” without the statute specifying a designated period in which to send the notice. The Florida Department of Revenue has not commented on what constitutes “prompt” notice.
If Florida real estate, including hotel and other resort properties, is an asset at some level in the transaction, then it may be prudent for the property-owning entity to notify the property appraiser of the circumstances surrounding the transfer. While the penalty appears to apply only when the 10 percent limit was applicable, it is not certain that this interpretation will be adopted by each property appraiser or the Florida Department of Revenue. It is conceivable therefore that a penalty may be imposed if the notice would have resulted in a reassessment above the property’s then assessed value but with less than a 10 percent increase.
The parties should also consider including in Florida hotel and resort purchase and sale agreements representations and warranties clauses addressing the property’s compliance with these notification requirements in the past and the parties’ respective responsibility for the current transaction, with sufficient survival provisions.
The Florida legislature has made structuring and closing hotel transactions more challenging – just what the industry needs.