Bar News - September 17, 2014
Changes in Real Estate Transfer Tax Rules Coming Soon
By: James O. Barney
“DRA policy of taxing the assignment of the ground lease is likely to remain a point strongly contested by parties to those transactions.”
The NH Department of Revenue Administration’s rules governing the imposition and calculation of New Hampshire’s real estate transfer tax, contained in Rev Chapter 800, are up for readoption this year, and after an initial public hearing last March and several stages of revision, are nearing final approval by the Joint Legislative Committee for Administrative Rules (JLCAR).
The committee approved the most recent draft Aug. 21 and set a Sept. 22 deadline for DRA to make final changes to the forms. Once the committee staff confirms that the amendments conform to the committee’s conditional approval, DRA will have 30 days to adopt the new set of regulations in final form.
The new regulations contain a few minor changes from the former Rev Chapter 800, but are most noteworthy for their omission of a new transfer tax on leases that was contained in the initial draft and then withdrawn after considerable comment at the public hearing.
While RSA 78-B has from the beginning expressly applied to all or most transfers, DRA has long exempted leases lasting 99 years or longer from the tax.
The initial draft of Rev Chapter 800 filed this year left that exemption provision intact, but a new subsection was added, providing that transfer tax was due for the transfer of a lessee’s interest in a ground lease having an original term (with all extensions) of 30 years or more. Comments submitted to DRA at the public hearing understandably questioned how the new proposed rule could coexist with the longstanding rule that transfer of a lease of up to 98 years is exempt from tax.
In a letter to JLCAR responding to the public hearing comments, DRA withdrew the proposed new rule, stating that the rule embodied DRA’s current policy and had been initially proposed for the purposes of clarifying existing policy. The letter stated that “it is [still] DRA’s position that the taxability of ground leases exists currently under New Hampshire law,” but did not adequately explain the apparent inconsistency of that position with the longstanding exemption for leases of up to 98 years.
In a transfer of a ground lease after buildings have been constructed, the lessee typically owns and gives a deed to the buildings – clearly subject to transfer tax – along with an assignment of the ground lease, so the greater part of the total consideration paid will normally be for the buildings. However, it would seem that the ground lease itself should be allocated a substantial part of the total consideration.
DRA policy of taxing the assignment of the ground lease is likely to remain a point strongly contested by parties to those transactions.
The new regulations contain many minor changes in wording and various forms, but there are only a few substantive changes.
REHC definition. The definition of “real estate holding company” (REHC) was simplified and will now conform to the governing statute, but leaves some doubt as to how it will be administered.
The original 1997 statutory definition of REHC was a “business organization” with real estate accounting for either a majority of its gross receipts or a majority of its total assets. The new definition was accompanied by a statutory amendment stating that transfers of ownership interests in REHCs would be subject to transfer tax, to the same degree as if the real estate had been transferred.
In 2006, the statutory definition of REHC was changed to “a business organization... engaged principally in the business of owning, holding, selling, or leasing real estate” and dropped the two alternative tests regarding a majority of income or assets. In 2009, the definition was further amended to substitute “an organization” for the former “a business organization.” The corresponding regulation has undergone similar revision, first adopting and now dropping the two alternative tests and the “business” qualification.
Taxable transfers. The new version of Rev 802.01, “Taxable Transfers,” provides for taxation of all real estate “sales, grantings, and transfers” not specifically exempted by statute, and a new definition section provides that “sale, granting and transfer” shall have the statutory definition of “every contractual transfer...,” with “contractual transfer” being statutorily defined as “a bargained-for exchange...” This change would appear to leave room for an argument that any transaction lacking the element of “bargained-for exchange” should not be subject to the transfer tax. Two recent Declaratory Rulings from DRA, Document #10391(July 26, 2013) and Document #10566 (April 8, 2014), also appear to provide support for such an argument.
Fannie Mae and Ginnie Mae. Rev 802.04, “Transfers Involving the United States Government,” is being readopted largely unchanged, except that the list of agencies specifically exempted from the transfer tax is being revised to delete the Federal National Mortgage Association (Fannie Mae), while retaining the Government National Mortgage Association [sic] (Ginnie Mae). There have been a number of federal court cases recently on the application of other states’ real estate transfer taxes to these governmental corporations, and it would appear that DRA believes it now has reason to distinguish between them.
Transfers of interests in REHCs. In 2006, RSA 78-B:1-a, V, was amended to provide that “Transfers of interests in an entity that holds, either directly or indirectly, an interest in a real estate holding company shall be considered to be a transfer of an interest in the real estate holding company...,” thus significantly expanding the reach of the new REHC tax. A number of commentators and legislators have noted that this expanded definition would technically sweep in every stock transaction in any company, no matter how large, that indirectly owned an interest in a New Hampshire REHC.
The new version of Rev 802.05, “Transfers of Interests in Real Estate Holding Companies,” adds a new subsection that repeats the statutory provision quoted in part above, but adds an exemption for a transfer of an interest that has a “de minimis” impact on the overall ownership interest of the real estate holding company “based on the number of owners and the interests held by each.” This would seem to be a reasonable narrowing of the broad statutory definition, but no further details are given in the regulation as to how a transaction’s “de minimis” status will be determined.
Restructuring of certain entities. Three substantial revisions are related to the taxation of certain corporate restructurings. First, Rev 803.04, “Single Entity Reorganizations,” has been added, providing that transfer tax is not due for “single-entity reorganizations pursuant to Internal Revenue Code §368(a)(1)(F) governing mere changes in identity, form, or place of organization, or 368(a)(1)(E) governing recapitalization.” This exemption is similar to a prior statutory exemption that applied to corporate reorganizations that were tax-free under the Internal Revenue Code; that exemption was added by statute in 1992 and repealed in 2001.
The second new provision is in Rev 803.05, “Carried Interests,” which exempts “changes in an owner’s carried interests” in an REHC or in an entity owning an interest in an REHC. The section defines “carried interests” as “a right that enables the owner of a partnership or limited liability company to share in the entity’s profits.”
The third new provision is Rev 804.02, “LLC Conversions,” providing that the conversion of any business entity to an LLC pursuant to RSA 304-C:149 “shall be considered a contractual transfer without consideration and therefore subject to the minimum transfer tax as set forth in RSA 78-B:1, I(b).”
There is an interesting question raised by the adoption of these three new sections: namely, whether Rev 803.04 overlaps and conflicts with Rev 804.02, in that both regulations would seem to apply to the conversion of a corporation to an LLC.
The two declaratory rulings referred to above both held that a similar conversion involving a single entity changing its form did not involve either a transfer of real estate or real estate interests, or consideration in the form of a bargained-for exchange, and were therefore exempt from the transfer tax. These declaratory rulings are consistent with new Rev 803.04, but not with Rev 804.02, which would make such a conversion a contractual transfer, not exempt from the transfer tax, but subject to the minimum transfer tax now applicable to transfers of real estate for no or minimal consideration.
|James O. Barney
James O. Barney has concentrated his practice on real estate as a member of Sulloway & Hollis in Concord for over 25 years, and is a past chair of the Bar’s Real Property Law Section.