SALES TAXES IMPACTING THE COMMERCIAL REAL ESTATE INDUSTRY
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SALES TAXES IMPACTING THE COMMERCIAL REAL ESTATE INDUSTRY
Page | 1
BACKGROUND
The Department of Revenue (DOR) is undergoing a rule development process, and it is the
understanding of the industry that the impetus behind this process is to provide clarity and certainty to
those taxpayers impacted by Florida Administrative Code on Sales and Use Tax. Specifically, Rule 12A-
1.070, regarding among other topics lease and license of real property—a tax that is a unique burden to
commercial property owners and tenants in Florida—has reportedly not been modified since 1995. Its
purpose is to clarify Florida Statutes §212.031.1(c) imposing sales tax “for granting of a privilege to use or
occupy real property.” With the increased level of sophistication on commercial real estate transactions,
and with the recent court decisions1 impacting sections of this rule, the DOR thought it timely to conduct a
rule development process for Rule 12A-1.070. This has included workshops to obtain public comment in
late 2011 and most recently on June 6, 2012, which this group has actively participated in.
The issues of importance to the commercial real estate industry include rule changes to the utility
calculations, lease terminations, tenant improvements, real estate taxes, progression of transactions, and
billboard sections. Detailed comments from the industry on are contained in the attached Exhibit.
Taxation of tenant improvements as if they are rental payment is the largest section of rule changes, and
is of highest importance to the commercial real estate industry. From discussions with the DOR, it seems
the drive behind this rule development process is a series of sophisticated and complicated commercial
real estate transactions rendering uncertainty and inconsistencies when presented for review by DOR
auditors. The DOR has offered assurances during the public comment workshops that the intent of the
rule changes to the tenant improvement section would not impact transactions where the landlord
extends a tenant improvement allowance, capital improvements in induce tenancy, or a turnkey tenant
improvement project. Rather, the sales tax would apply to tenants funding and completing improvements.
As examples, the DOR has had issue in defining consideration in deals such as (1) office condos, (2)
single purpose LLCs with leaseback to the LLC, (3) real estate taxes paid by parceled tenants, (4)
storage units in hotel settings for audio-visual services, and (5) a tenant constructing an improvement on
a ground lease where no ground rent is given over a term, and the improvement reverts to the landlord at
the end of the term. Even though there has been a level of increased sophistication in commercial real
estate transactions over recent years, these five examples cannot be extrapolated as industry norm. It
would be a great detriment to the wider industry to implement rules based on these very specific
examples.
The commercial real estate industry looks forward to continuing to provide valuable market feedback to
the DOR regarding this extremely important rule development process. We look forward to demonstrating
the impact of the rule language on job creation in our industry and economic recovery in Florida.
ACTION REQUESTED
Our industry is prepared to volunteer time and talent to work with the DOR in evaluating the proposed rule
changes’ impact to our industry; we request that the DOR continue in dialogue with our industry. Our
members are prepared to advocate at the executive, judicial and legislative branches to ensure economic
vitality of our industry and job creation in our industry.
1
The controlling case law in Florida regarding imposition of sales tax on tenant improvements include Department of Revenue v. Seminole Clubs, Inc.,
745 So.2d 473 (Fla. 5th DCA 1999) and Department of Revenue v. Ruehl No. 925, LLC, 76 So.3d 389 (Fla. 1st DCA 2011). Importantly, in the most
recent decision, Ruehl, after a fact-intensive analysis, the court found that the tenant improvements did not qualify as taxable rent. In making this ruling,
the court looked to several fact, including (1) a lease requirement to refurbish, (2) landlord required approval of the improvements, (3) minimum funding
required to be expended on the tenant improvements, (4) the periodic or onetime nature of the improvement, (5) if the improvement was to bring the
premises to “suitable condition” for occupancy, (6) the extent of landlord requirements for compliance with architectural or code concerns, (7) evidence
rental rates would have been higher if the landlord would have funded the improvements, (8) evidence the transaction was structured to avoid taxation,
(Ruehl, 2) (9) if the improvements were defined as in lieu of rent, or (10) if a credit would have been granted the landlord should the improvements not
occurred (Ruehl, 3).SALES TAXES IMPACTING THE COMMERCIAL REAL ESTATE INDUSTRY
Page | 2
THE INDUSTRY’S POSITION ON TAXATION OF TENANT IMPROVEMENTS AS PROPOSED
• The commercial real estate industry warns against rule changes that create unfair double taxation
• Requiring every commercial property owner and prospective tenant to contemplate a transaction’s
economic substance to define tax implications is an undue burden and will require extensive
administrative and professional costs to commercial real estate industry participants
• Imposing more taxes on our industry discourages job creation in a time when job creation is essential
• The proposed complicated analysis creates uncertainty when the intent should be to create certainty
for the market
• The timing of this rule development is unfortunate, when the recession has evidenced a slow pace of
recovery and our industry has received the brunt of the impact
• Consideration of impact to related taxation such as at the federal level, and impact to default
language in leases and licenses is paramount
• Generalizing fact-specific analysis for application to a complex industry in whole does not render a
fair and equitable taxation system
• Taxes added to previously-untaxed transactions severely impair the value and viability of commercial
assets
STATEMENT OF INTEREST
The commercial real estate industry trade organizations contributing to this position paper, listed below,
represent the third largest sales tax-paying base in the state of Florida, and nearly 6,500 members. These
groups have a substantial interest in the rule language.
The Building Owners and Managers Association of Florida represents over 1,500
members throughout the State of Florida. The organization includes owners and third
party managers, as well as associate members servicing the commercial industry.
www.bomaflorida.org (contact Lacey Willard at lacey.willard@cbre.com or 813.273.8412)
Florida CCIM (Certified Commercial Investment Member) Chapter represents over 600
members across the state. These real estate professionals are recognized experts in the
commercial and investment real estate industry. This elite corps of CCIMs includes
brokers, leasing professionals, investment counselors, asset managers, appraisers,
corporate real estate executives, property managers, developers, institutional investors,
commercial lenders, attorneys, bankers, and other allied professionals. www.flccim.com
The membership of the Florida Gulfcoast Commercial Association of Realtors represent
commercial real estate professionals in the Hillsborough, Pinellas, Polk, Pasco, Manatee,
and Sarasota county areas in all commercial product types. The organization includes
500 members. www.fgcar.org
ICSC (International Council of Shopping Centers) is the premier global trade association
of the shopping center industry. Florida membership represents over 7% (3,850
members) of the entire 55,000 members in over 90 countries include shopping center
owners, developers, managers, marketing specialists, investors, retailers and brokers, as
well as academics and public officials. www.icsc.orgSALES TAXES IMPACTING THE COMMERCIAL REAL ESTATE INDUSTRY
EXHIBIT A: COMMENTS TO THE PROPOSED RULE 12A-1.070 F.A.C.
Page | 1 Exhibit A
INTRODUCTION
The intent of this Exhibit is to apply the policy considerations as outlined in the position paper above to
the proposed changes to Rule 12A-1.070. Although the commercial real estate industry will be tracking
closely changes to other portions of the Rule such as utility charges (§2(e)), lease termination fees
(§2(h)), Progression of Transactions (§6(a)), and billboards (§20 a)), at this time we offer comment to the
following three sections: Tenant Improvements (§2(i)), and Real Estate Taxes (§2(d)).
The proposed rule language is offered below in black, and our comments and suggested language
updates are offered in the blue text.
INDUSTRY’S COMMENTS TO CHANGES TO RULE 12A-1.070 § 2(I)
ON TENANT IMPROVEMENTS
Rule 12A-1.070 § 2(i) 1. Real property improvements completed or funded by a tenant are never part of
the total taxable rental consideration if the improvements are not required by the lease or license or
permanently remain the property of the tenant. Trade fixtures that remain the property of the tenant are
never part of the total taxable rental consideration.
Concern #1 on the term “by a tenant” as it pertains to landlords: The Department of Revenue has
offered assurances during the public comment workshops that the intent of the rule changes to
the tenant improvement section would not impact transactions where the landlord extends a
tenant improvement allowance, capital improvements in induce tenancy, or a turnkey tenant
improvement project. Rather, the sales tax would apply to tenants funding improvements. To
ensure complete clarity, our industry would recommend additional language after sentence one in
line with: “Real property improvements completed or funded by a landlord are never part of the
total taxable rental consideration.”
Concern #2 on the term “completed”: It is the understanding of the industry from comments
during public workshops that the intent of the rule changes in this section would not impact
transactions where the landlord extends a tenant improvement allowance, capital improvements
in induce tenancy, or a turnkey tenant improvement project; rather, the sales tax would apply to
tenants funding and completing improvements. It is the recommendation of the industry to further
clarify or delete the term “complete” in the excerpt “completed or funded by a tenant” from this
section. It is market standard for lease or license terms to contemplate a tenant improvement
allowance that may be utilized towards design and construction efforts completed by either the
landlord or the tenant. In the circumstance of a tenant completing improvements under a tenant
improvement allowance scenario, the rental rate in the lease or license is reflective of the
allowance and the lease or license party completing the improvements should have no additional
tax implications—which would render an unfair double taxation scenario. Rather, the rule should
be clarified to make certain it applies to the lease or license party who is funding the
improvements, not completing the improvements. The commercial real estate industry warns
against rule changes that create unfair double taxation.
Concern #3 on the term “required by the lease or license” as it pertains to non-monetary
elements: In the commercial real estate industry, leases and licenses are oftentimes drafted to
reflect non-monetary elements that impact tenant improvements – such as the aesthetic
preferences of the landlord for the asset in order to maintain value, target credit worthiness of
potential tenants, lending requirements imposed on the landlord on financed projects, code
requirements imposed on the landlord by a local authority, development requirements imposedSALES TAXES IMPACTING THE COMMERCIAL REAL ESTATE INDUSTRY
EXHIBIT A: COMMENTS TO THE PROPOSED RULE 12A-1.070 F.A.C.
Page | 2 Exhibit A
on the landlord by a local authority or other non-monetary elements – that result in a definition of
how tenant improvements will be handled in a lease or license. In fact, the court in Ruehl
recognized improvements may be necessary to be “consistent with the architectural requirements
of the landlord, building codes, etc.” (Ruehl, 2). These non-monetary reasons to require definition
of tenant improvements in the lease or license, under the current rule drafting, may be interpreted
to impose sales tax on those improvements. In fact, the improved market status of the asset due
to these higher non-monetary standards imposed on leases and licensees reflects a higher rental
rate that is already taxed, thereby imposing an unfair double tax if the tenant improvements are
also taxed. The commercial real estate industry warns against rule changes that create unfair
double taxation.
Concern #4 on the term “required by the lease or license” as it pertains to extent of definition: The
industry has concern regarding how extensively a tenant improvement must be identified in lease
or license to qualify here. Simply because a tenant improvement is wholly or partially identified or
required in a lease or license is not indicative of consideration of the monetary elements of the
leases or license terms—especially considering not all tenant improvements are scoped the
same, with some having extensive build-out and some being only carpet and paint; considering
the value and scope of these improvements are determined by the tenant and not the landlord;
considering it is often the case that a lease or license clause is simply acknowledging a tenant’s
intention to complete improvements for which the landlord will not be responsible; considering the
landlord may have interest in defining limited tenant improvement elements that work to maintain
a property’s code compliance, development agreement compliance, financing agreement
compliance, or aesthetic consistency; and considering some leases or licenses loosely identify a
tenant’s right to install cabling, security, communications, or similar system within a tenant
improvement section that do not constitute traditional tenant improvements, consideration, or
privilege to occupy the space. The proposed complicated analysis creates uncertainty when the
intent should be to create certainty for the market.
Concern #5 on the term “required by the lease or license” as it pertains to extent of definition: The
industry has concern regarding how extensively a tenant improvement must be identified in lease
or license to qualify here. If a lease or license requires landlord consent or approval prior to
proceeding with any tenant improvements completed and funded by the tenant, does taxation
apply? There are many market and legal-based concerns driving a landlord to reserve the right to
consent or approve tenant improvements—such as protection from liens; protection from code
violations; or assurance of consistency with the development, code, or design requirements. The
proposed complicated analysis creates uncertainty when the intent should be to create certainty
for the market.
Concern #6 on the term “permanently remain the property of the tenant” as it pertains to
restoration or waivers of restoration: The industry has concern regarding waivers of restoration. A
landlord may grant a tenant a waiver of restoration thereby waiving any obligations of the tenant
to restore premises to the condition at lease or license signing for many non-monetary reasons.
For example, a waiver of restoration may reflect the negotiation power of the parties; it may
reflect the un-removable nature of the tenant improvement such as paint; or it simply may reflect
the market standard practices captured in a boilerplate lease or license without regard to
monetary terms or tax implications. Imposing tax on a tenant improvement when these
circumstances are present renders an unfair double taxation as the rental rate will have already
reflected the negotiation power of the parties or market standard practices. The commercial real
estate industry warns against rule changes that create unfair double taxation.SALES TAXES IMPACTING THE COMMERCIAL REAL ESTATE INDUSTRY
EXHIBIT A: COMMENTS TO THE PROPOSED RULE 12A-1.070 F.A.C.
Page | 3 Exhibit A
Concern #7 on the term “permanently remain the property of the tenant” as it pertains to partial
restoration and waivers of restoration: The industry has concern regarding partial waivers of
restoration. It is the case in many leases and licenses that elements of the tenant improvement
may be identified in the lease or license to remain property of the landlord at the end of the term,
and some elements of the tenant improvement may be identified in the lease or license to remain
property of the tenant at the end of the term. Is then only the portion of the tenant improvement
remaining property of the landlord at the end of the term determined to be consideration? If so,
this is an extreme administrative and cost burden on the lease or license parties to separately
account for these differing elements in the lease or license drafting process as well as in the
construction process.
Concern #8 on the term “permanently remain the property of the tenant” as it pertains to the
usefulness of second plus generation space: It seems that save the specific examples the
Department of Revenue has offered (describing a tenant constructing an improvement on a
ground lease where no ground rent is given over a term, and the improvement reverts to the
landlord at the end of the term) in the vast majority of circumstances, there is speculative, no, or
even negative usefulness of a tenant improvement at expiration of the lease or license term.
Because it is the tenant controlling the scope of improvements and not the landlord, no
assurances are available to the landlord that these improvements will render direct or indirect
value to a speculative future tenant. It is true for office, retail, industrial, and non-core commercial
real estate assets that it is rare to capture a potential tenancy whose space requirements match
exactly those of the vacated prior tenant. In fact, abandoned tenant improvements allowed
through waivers of restoration or simply inherited are required to be demolished in large part by
subsequent space requirements of a new tenant or by code. Therefore, tenant improvements that
remain the property of the landlord in actuality are not a benefit but a detriment to the landlord.
This is true for a landlord for both financial reasons, such as funding the cost of demolition, and
for marketability reasons, when inheriting an unaesthetic, inefficiently designed, or otherwise
unmarketable tenant improvement. Further, the lack of clarity and speculative nature of valuation
of these improvements at the time of lease or license transaction makes it impossible for the
parties to include the improvements in the bargained-for consideration. This is an example of
where generalizing fact-specific analysis for application to a complex industry in whole does not
render a fair and equitable taxation system.
Rule 12A-1.070 § 2(i) 2. Tenant improvements required to be completed by the lease or license and that
become the property of the landlord are not part of the total taxable rental if:
Concern #9 on the below-required subparts: In the Ruehl decision, the court mentions several
facts2 presented by the parties, utilized in the analysis of the taxable nature of the transaction,
including: (1) a lease requirement to refurbish, (2) landlord required approval of the
improvements, (3) minimum funding required to be expended on the tenant improvements, (4) the
periodic or onetime nature of the improvement, (5) if the improvement was to bring the premises
to “suitable condition” for occupancy, (6) the extent of landlord requirements for compliance with
2
It is important to note that the Ruehl decision is based on facts available to the court for purposes of deciding that particular case.
Although precedent-setting in the jurisdiction of the appellate court, the salient facts available to the court may not be indicative of
salient facts that would be presented in every office, retail, industrial, or non-core commercial real estate transaction. The industry
believes that a casual transfer of the facts available in Ruehl or even Seminole into factors intended for application to every
commercial real estate transaction would be inappropriate and detrimental. Uncertainty is created when irrelevant or too-far-
reaching factors are imposed on transactions that are varied and specialized, and the industry warns against creating uncertainty in
the market.SALES TAXES IMPACTING THE COMMERCIAL REAL ESTATE INDUSTRY
EXHIBIT A: COMMENTS TO THE PROPOSED RULE 12A-1.070 F.A.C.
Page | 4 Exhibit A
architectural or code concerns, (7) evidence rental rates would have been higher if the landlord
would have funded the improvements, (8) evidence the transaction was structured to avoid
taxation, (Ruehl, 2) (9) if the improvements were defined as in lieu of rent, or (10) if a credit would
have been granted the landlord should the improvements not occurred (Ruehl, 3). However, prior
to offering these factors, the court in Ruehl recognized a “blanket application is not justified.”
(Ruehl, 1).
There are ten factors delineated by the court in Ruehl, and no preference was indicated for any
one of these factors. It is of major concern to the industry that the Department of Revenue has:
• Chosen one of these ten factors as mandatory in the determination of taxation (“required
by the lease or license”);
• Added another factor not mentioned in the most recent case law on point as mandatory
(“permanently remain the property of the landlord”);
• Chosen six more factors for inclusion as subparts (if the improvement was to bring the
premises to “suitable condition” for occupancy; minimum funding required to be
expended on the tenant improvements; if a credit would have been granted the landlord
should the improvements not occurred; if the improvements were defined as in lieu of
rent—but adding without apparent case law support rent, additional rent, rent-in-kind
here; evidence rental rates would have been higher if the landlord would have funded the
improvements; and evidence the transaction was structured to avoid taxation);
• Then excluded the remainder of the factors (landlord required approval of the
improvements; the periodic or onetime nature of the improvement; and the extent of
landlord requirements for compliance with architectural or code concerns).
By voicing this concern, the industry is not suggesting that all factors need be mandated or
included in subparts or even included at all. Rather, this is an example of the proposed
complicated analysis creating uncertainty when the intent should be to create certainty for the
market.
Concern #10 on the below-required subparts: There is no evidence from review of either the
Ruehl or Seminole case decisions that the elements listed in this proposed rule were intended as
a set of conditions that, if applicable, would require taxation. In fact, the court stated in Ruehl a
“blanket application is not justified.” (Ruehl, 1). The Ruehl and Seminole case decisions offered
fact-specific analysis intended to narrowly define the taxable nature of the transactions presented
in these cases. Creating criteria listing such as the one presented in the proposed rule, that every
commercial real estate transaction must follow to properly determine for the parties the tax
implications, is in the industry’s opinion an overstatement of the court holdings. Further, as
evidenced by the detailed set of concerns contained in this Exhibit, a rule that demands too
extensive subjective analysis for the parties, the market, and the Department of Revenue auditors
is difficult to interpret, difficult to apply, and difficult to comply with. Requiring every commercial
property owner and prospective tenant to contemplate a transaction’s economic substance to
define tax implications is an undue burden and will require extensive administrative and
professional costs to commercial real estate industry participants.
Concern #11 on the below-required subparts: In the event a rule development process continues
with the framework of criteria listing, the industry strongly recommends adding language such as
“if any one of the following conditions apply” to this section, and adding the term “or” as a
connective. This will better reflect the presentation of factors within the court holdings as one of
several factors leading to a determination of the taxable nature of a tenant improvement.SALES TAXES IMPACTING THE COMMERCIAL REAL ESTATE INDUSTRY
EXHIBIT A: COMMENTS TO THE PROPOSED RULE 12A-1.070 F.A.C.
Page | 5 Exhibit A
Rule 12A-1.070 § 2(i) 2(a). the improvements are made in order to put the premises in a condition
suitable for the operation of the tenant’s business,
Concern #12 on the term “suitable”: This subpart is referenced in Ruehl as a factor the court used
to distinguish the facts from Seminole. However, using the term “suitable” outside of a fact-
specific judicial analysis is problematic. Is it the tenant, the landlord, the Department of Revenue,
or even the market who is determining what constitutes a suitable condition? Requiring every
commercial property owner and prospective tenant to contemplate a transaction’s economic
substance to define tax implications is an undue burden and will require extensive administrative
and professional costs to commercial real estate industry participants. Further, a rule that
demands too extensive subjective analysis such as outlined here is difficult to interpret, difficult to
apply, and difficult to comply with for the parties, the market, and the Department of Revenue
auditors.
Concern #13 on the term “to put the premises in a condition” as it pertains to the timing of the
tenant improvements: The Ruehl holding mentions the periodic nature of the tenant
improvements as a factor in determining the taxable nature of the transaction in the same
sentence that is offered in this subsection of the rule. It is unclear to the industry why the periodic
nature factor used by the court was selectively not incorporated into the rule. Most tenant
improvements are completed and funded at lease or license commencement or within a
reasonable timeframe thereafter. It is unclear from the language proposed, however, if tenant
improvements completed subsequent to this timeframe would be subject to a taxation analysis.
The proposed complicated analysis creates uncertainty when the intent should be to create
certainty for the market.
Rule 12A-1.070 § 2(i) 2(b). there is no requirement to spend a specific or minimum amount of money on
the improvements,
Concern #14: The court in Ruehl stated: “Just because a lease provision contemplates the
expenditure of funds by a tenant does not make that expenditure rent.” (Ruehl, 2). Depending on
the circumstances of the transaction, and taken in conjunction with the remainder of concerns
listed in this position paper, this factor may be reasonable or problematic. Expenditure of a
specified sum by a tenant, without specificity as to scope, as required by a lease or license, does
not necessarily leave the landlord with an improvement that is valuable at the term of the lease or
license. It may be that the lease or license is specifying an amount solely for the purpose of
creating an expectation as to the level of quality of tenant improvement that is not intended as a
factor in consideration or as a taxable event.
Rule 12A-1.070 § 2(i) 2(c). there is no credit given against rental payments,
Concern #15: This subpart requirement was referenced in Ruehl as one of the factors that the
court used to distinguish it from Seminole. This seems to be an element distinguishing Ruehl from
Seminole rather than a mandatory element of analysis the court is referencing. In practice, in
many commercial leases and licenses, it is not common for the tenant to receive an actual credit
for the value of its leasehold improvements against the rent payments due under the lease or
license. However, the language as presented in the rule may be interpreted as any “credit”
delineated in the lease or license. It could also be interpreted to cover imputed credits that theSALES TAXES IMPACTING THE COMMERCIAL REAL ESTATE INDUSTRY
EXHIBIT A: COMMENTS TO THE PROPOSED RULE 12A-1.070 F.A.C.
Page | 6 Exhibit A
DOR may impose. Lease and license credits are expansive and can be offered in a commercial
real estate setting for a number of reasons—interruption of service, unspent landlord-funded
tenant improvement allowances, common area maintenance calculations, violation of lease or
license terms, etc. It is not clear from the language offered that the credit pertains solely to tenant
improvements funded by the tenant where the improvements would remain the property of the
landlord, as outlined in the remainder of the proposed rule. The proposed complicated analysis
creates uncertainty when the intent should be to create certainty for the market.
Rule 12A-1.070 § 2(i) 2(d). the improvements are not classified as rent, additional rent, rent-in-kind, or in
lieu of rent,
Concern #16 on the terms “rent, additional rent, rent-in-kind”: The Ruehl court referenced the
term “rent in lieu,” however, did not reference classifying the improvements as “rent”, “additional
rent”, or “rent-in-kind”. This language is problematic, when taken in consideration with the other
concerns outlined in this document, for landlords who wish to preserve default rights through
reference to approval of tenant improvements funded by the tenant as “rent.” Tying default rights
to those lease and license elements termed “rent” is a common practice in commercial real estate
lease and license drafting. Forcing taxation on classification of all lease or license references to
tenant improvements as “rent”, thereby forcing lease and license redrafting on all default
provisions, places an undue burden on the commercial real estate industry. Further, this places
lease and license terms in a position of untested drafting, exposing the parties to uncertainty.
Further yet, requiring changes in definition to lease terms may impact federal taxation reporting.
The proposed added language creates uncertainty when the intent should be to create certainty
for the market.
Concern #17 on the classifier: The Ruehl court referenced the term “rent in lieu,” however, did not
require that improvements be classified by any lease or license party in any manner. This factor
could be problematic. There is no indication on who conducts the classification: the landlord, the
tenant, the Department of Revenue, or the market. Further, the parties have no control over how
the other accounts for the tenant improvements in its internal accounting system. Generally
accepted accounting principles are oftentimes but not always followed depending on the
requirements of the landlord or tenant entity. However, when operating under generally accepted
accounting principles, an entity is required to capitalize and depreciate an improvement over the
life of the lease or license; but many tenant bookkeepers will account for the cost of the
improvement as “rent”, because it has been standard to do so. The proposed added language
creates uncertainty when the intent should be to create certainty for the market.
Rule 12A-1.070 § 2(i) 2(e). there is no evidence the improvements provide an economic benefit to the
landlord based on the useful life of the improvement compared to the term of the lease, and
Concern #18 on the term “economic benefit”: The industry’s first concern here is that this term,
“economic benefit,” is not referenced or utilized in the Ruehl case decision. Although the court
mentions as a factor evidence rental rates would have been higher if the landlord would have
funded the improvements, imposing the term “economic benefit” is perhaps the most problematic
of the factors for the commercial real estate industry to interpret. The term “economic benefit” can
be construed to apply to monetary or financial deal terms such as rental rate, free rent, leasing
commission structures, tenant improvements, credits, or the like. Or it can be a more subtly-
defined portion of the deal terms such as those contributing to maintaining long term value of the
asset—such as preserving the aesthetic components of the asset, the developmentSALES TAXES IMPACTING THE COMMERCIAL REAL ESTATE INDUSTRY
EXHIBIT A: COMMENTS TO THE PROPOSED RULE 12A-1.070 F.A.C.
Page | 7 Exhibit A
requirements, or code requirements. These latter terms merely maintain the value of the asset for
the long term, requiring compliance with design standards, and do not render an enhanced value
or benefit to a landlord. In the circumstance where a landlord includes these non-monetary or
financial terms, the rental rate in the lease or license is already reflective of the requirements—
which if imposed would render an unfair double taxation scenario. The commercial real estate
industry warns against rule changes that create unfair double taxation.
Concern #19 on the term “economic benefit”: Further, in these challenging economic times—
where occupancy rates continue to fall, rental rates continue to decline, where Florida continues
to track in the top three states of delinquency on mortgage payments on CMBS product, and
foreclosures continue to be backlogged, where commercial real estate construction jobs are
again decreasing3—it is difficult for the market itself to define economic benefit. Requiring every
commercial property owner and prospective tenant to contemplate a transaction’s economic
substance to define tax implications is an undue burden and will require extensive administrative
and professional costs to commercial real estate industry participants.
Concern #20 on the term “economic benefit”: This term is even further complicated as the
economic benefit to a landlord of a tenant improvement is not determined at the time of
transaction, or even during the course of the lease or license term. Rather, the true economic
benefit is evident when and if a landlord is able to convert the usefulness of the tenant
improvement to another, subsequent tenancy for value (as “value” is defined under Fla. Stat Sec.
212.031(1)(c)). This benefit, in fact, may be a detriment if the landlord would be required to fund
demolition of the tenant improvement prior to realizing a full depreciation. Imposing a requirement
to then hire an appraiser, expert witness, or consultant to evaluate this depreciation schedule for
each tenant improvement is overly burdensome to the taxpayer. Further, the timing of realizing
any economic value is complicated in the event of eviction. As a matter of policy, the landlord
should be able to terminate the lease or license if the tenant fails to pay its rent, or is otherwise in
default, without the possibility that the State will impose a tax on it. The industry has concern that
under the proposed rule, it seems that an eviction could create a taxable event to the landlord.
From the reading of the language offered, it is not clear as to the DOR’s intended timing of the
supposed benefit (at substantial completion; at default; at occupancy of subsequent tenancy
utilizing the improvements, etc.) nor the scope of the supposed benefit (rather than defining as a
simple leasehold covenant creating incidental benefits). Requiring every commercial property
owner and prospective tenant to contemplate a transaction’s economic substance to define tax
implications is an undue burden and will require extensive administrative and professional costs
to commercial real estate industry participants.
Rule 12A-1.070 § 2(i) 2(f). there is no evidence that there was an attempt to reclassify rental payments to
avoid the tax.
Statement: The industry agrees that in an ordinary arm’s length commercial lease or license
transaction, there should not be any evidence that there was an attempt to reclassify leasehold
improvements as rent. Notwithstanding that agreement, a catchall provision this expansive
3
“The state [of Florida] lost 9,200 construction jobs over the month, far more than any other industry. Over the year, Florida's
already depressed construction sector shed 24,500 more jobs, more than any other state.”
(http://www.tampabay.com/news/business/workinglife/florida-unemployment-falls-to-87-percent-but1608230/1230780)SALES TAXES IMPACTING THE COMMERCIAL REAL ESTATE INDUSTRY
EXHIBIT A: COMMENTS TO THE PROPOSED RULE 12A-1.070 F.A.C.
Page | 8 Exhibit A
creates extensive uncertainty in the industry. The proposed complicated analysis creates
uncertainty when the intent should be to create certainty for the market.
Rule 12A-1.070 § 2(i) 3. Tenant improvements required to be completed by the lease or license that
become the property of the landlord and do not meet the conditions in subparagraph 2 are taxable as part
of the total rental charged. Tax is due on the consideration received.SALES TAXES IMPACTING THE COMMERCIAL REAL ESTATE INDUSTRY
EXHIBIT A: COMMENTS TO THE PROPOSED RULE 12A-1.070 F.A.C.
Page | 9 Exhibit A
INDUSTRY’S COMMENTS TO CHANGES TO RULE 12A-1.070 § 2(D)
ON TAXATION OF AD VALOREM TAXES
Rule 12A-1.070 § 2(d).
The industry recommends updating the last line of this rule to reflect that ad valorem taxes are
not taxable. The commercial real estate industry warns against rule changes that create unfair
double taxation.
Rule 12A-1.070 § 2(e).
The industry recommends updating the first line of this rule to reflect that common area
maintenance charges paid by the tenant are not taxable. The commercial real estate industry
warns against rule changes that create unfair double taxation.
The industry recommends that CAM charges are not taxable if they are otherwise exempt by
statute or Constitutional provision or are exempt by provisions of this Rule. The commercial real
estate industry warns against rule changes that create unfair double taxation.You can also read
