Opinion
No. 792 C.D. 2008.
Argued: June 10, 2009.
Filed: July 30, 2009.
BEFORE: LEADBETTER, President Judge; McGINLEY, Judge; SMITH-RIBNER, Judge; PELLEGRINI, Judge HONORABLE JUBELIRER, Judge; LEAVITT, Judge; BUTLER, Judge.
OPINION NOT REPORTED
The City of Philadelphia (City) appeals the order of the Court of Common Pleas of Philadelphia County (common pleas court) which affirmed the decision of the Tax Review Board of the City of Philadelphia (Board) which granted the petition of First State Investors 3300 LLC (First) to abate an additional realty transfer tax assessed by the City.
American Financial Realty Trust (AFRT) is a real estate investment trust formed in 2002 to acquire commercial real estate for lease primarily to banks and other regulated financial institutions. In July 2003, AFRT approached Wachovia Bank, National Association (Wachovia) with a general proposition to purchase at book value an unspecified number of Wachovia's properties as designated by Wachovia. Under AFRT's proposal, Wachovia would sell real estate to AFRT and lease back the space it currently needed or believed it would need in the near future.
In 2004, AFRT established a subsidiary, First, for the sole purpose of purchasing 147 properties from Wachovia. Wachovia had substantial excess space because of various prior bank mergers in which it had participated. A national bank is not permitted to hold commercial real estate unless it is using part or all of it for its own banking purposes. A bank must reclassify unused property as "other real estate owned" (OREO) and write down the OREO to market value or carry it as book value and then dispose of it. Under the terms of the agreement, First was required to acquire seventeen properties which Wachovia deemed undesirable and which Wachovia had been unable to sell despite attempts over an extended period. Wachovia provided First with the other properties it was willing to sell. After lengthy negotiations, over several months, the parties agreed for First to purchase 147 properties for $504,613,403.02. This amount was the sum of Wachovia's book values for the properties as of the September 22, 2004, closing date.
Three properties which are the subject of this litigation were located in the City. The Independence Mall property was valued at $23,963,083.51. The Chestnut property was valued at $757,777.66. The Castor Property was valued at $1,020,139.42. The values attributed to these properties were the value of the properties on Wachovia's books as of the closing date. Wachovia leased back approximately 60% of the space. As a result, First received a rate of return of 8.5% on the portion of the purchase price it paid for the space that was leased back. Based on a formula agreed on by the parties, the total amount of the rent of the space being leased back was $27,892,645, which divided by 4,686,721.85 square feet of Wachovia rental space, yielded $5.9514, which rounded to $5.95 per square foot, constituted the base or blended rent for the rented space, including space rented in the Philadelphia properties.
In November 2004, when the deeds for the Philadelphia properties were recorded, the realty transfer tax was determined based on the claimed consideration paid which was a total of $25,741,000.59. First remitted the corresponding 3 percent transfer tax or $772,230.00. The City audited the transactions. The City reviewed the Realty Transfer Tax Certifications filed with the Records Department. The auditors determined that there were large discrepancies between the consideration identified for transfer tax purposes and the value as calculated on the certifications. The fair market value was approximately double the book value. Wachovia itself had previously appraised the Independence Mall property in connection with a real estate tax case and argued that the property was worth $37 million rather than the assigned value of $23.9 million. On December 29, 2004, the City's auditor sent a letter to First which requested documentation to verify the consideration paid for the three properties, but First did not respond. The City then assessed additional transfer tax on the three properties in the amount of $741,829.00. The City obtained this figure by relying on the assessed values as assigned by the Board of Revision of Taxes for real estate tax purposes with interest and penalties. As of December 31, 2008, the total the City claimed was due was $1,687,660.98, comprised of $741,829.00 in principal, $370,914.50 in interest, and $574,917.49 in penalties.
Before the Board, the City argued that the three properties should be valued at a total of over $43 million and that the Board must treat the value of the leasing arrangement as additional consideration. The Board granted First's appeal:
Both parties agree that this was a bona fide, arms length transaction.
With this as the starting premise, the issue before the TRB [Board] is whether The Philadelphia Code Chapter 19-1402(14) and accompanying Philadelphia Regulations §§ 302 and 306 require that Realty Transfer Tax (RTT) be paid based on the actual cash consideration paid by the buyer to the seller, thus ending the Board's analysis. Or, if as the City contends, the deed sets forth only a nominal consideration is the actual consideration on which RTT is to be calculated the cash paid plus the value of the leasehold interests i.e. do the cash and non-cash consideration equal the sale price for RTT purposes regardless of the fact that the transaction is a bona fide, arms length deal? The City contended that the lease arrangement was such a bargain to Wachovia that it was proof that the cash consideration was nominal and that the value of the leasing arrangement had to be added as additional consideration to make the deal worthwhile to Wachovia.
It was the determination of the TRB [Board] that it was necessary to look at the totality of the sales transaction as a business transaction for the 147 properties between the buyer and seller. All properties were valued uniformly, at the book value. For some, this may have been above market value and for others, below market value. Special consideration was not given to the three Philadelphia properties in the deal. The Board found that this business transaction should be considered as a whole and that it was not a situation where 3 individual properties could be pulled out for individual evaluation separate and apart from the other 144 properties that made up the deal.
It was the finding of the Tax Review Board that the consideration was not nominal, such that the Board would look outside the cash consideration paid for other non-cash compensation, such as to the leasing arrangement. In addition, the Board did not find that the leasing arrangement provided Wachovia with a bargain deal with so much value that the cash consideration had to be considered nominal.
. . . .
The City concurs that this was a bona fide sale and an arms length business transaction between the parties. The Philadelphia Code Chapter 19-1402(14)(a) and Philadelphia Realty Transfer Tax Regulation 302 state that where there is a bona fide sale of real estate pursuant to an arm's length transaction, the value for purpose of RTT is the actual consideration agreed upon by the parties. The City argues that the rent paid by Wachovia for the three Philadelphia properties should be counted as additional consideration on which RTT should be paid.
The City bases its arguments on the following factors. The City contends that the adjusted book value amount paid for each Philadelphia property was below the market value and therefore should be considered nominal to the point where it is necessary or required to look for other consideration for the transfer. The City also contends that the lease arrangement was for a below market rate thus bolstering its argument that Wachovia was willing to enter into a transaction where the cash it received for the Philadelphia properties was below their actual value because the leaseback arrangement provided additional value for each property.
However, this transaction was far bigger than the three properties in Philadelphia. It strained credibility to ask the TRB [Board] to look at a transaction involving 147 properties across 10 states and single out three that happened to be located in Philadelphia as being misvalued or undervalued.
It is the finding of the TRB [Board] that the actual cash considerations paid for the properties was not nominal but based on an arms length negotiation for a total of 147 properties. The $504 million agreed to based on the adjusted book value was considerable consideration taking into account all factors. For example, there were 17 `must take' properties that Wachovia insisted on as part of the sale where book value was above market value, just as there were other properties where book value may have been equal to or less than market value.
Tax Review Board Decision, November 1, 2007, at 3, 5-6; Reproduced Record (R.R) at RR20, RR22-RR23. The Board was not persuaded that the leasing arrangement was an additional non-cash consideration for the sale and purchase of the properties.
The City appealed to the common pleas court which affirmed:
The City contends that the value of the transaction should have been computed differently under 19-1402(14)(b) for assessment of realty transfer tax. However, subsection (b) applies only in cases where there is no arm's length transaction or where the consideration received is unclear. The TRB [Board] found that the consideration was clear and was the agreed consideration paid of $504 million. The TRB [Board] committed no error of law and correctly applied subsection (a) to value this transaction of a bona fide sale of real estate at arm's length. The findings of the TRB [Board] are supported by substantial evidence and therefore this Court affirmed the TRB's [Board] determination.
Common Pleas Court Opinion, September 10, 2008, at 3; R.R. at RR27.
On appeal, the City contends that where three individual Philadelphia properties were included in a group sale of 147 properties in over 100 different cities, but where (1) there were no negotiations for the value of the individual properties, (2) the assigned values for the individual properties admittedly did not correlate to actual value, and (3) the buyer and seller here actually had convergent incentives to assign as low a price as possible to the three Philadelphia properties, the Board erred when it valued the three Philadelphia properties for realty transfer tax purposes at the buyer's and seller's assigned values.
This Court's review is limited to a determination of whether constitutional rights were violated, an error of law was committed, or the Board's findings of fact were not supported by substantial evidence.City of Philadelphia v. Tax Review Board ex rel. Floyd, 929 A.2d 685 (Pa.Cmwlth. 2007).
Initially, the City contends that additional realty transfer tax should be assessed against First because First's and Wachovia's assigned values for the sale do not constitute actual consideration paid or actual monetary worth. The City asserts that the total consideration paid for all 147 properties was the actual value. The City does not quarrel with the Board's determination that the total transaction was negotiated at arms length and that the $504 million represented the actual consideration for the whole purchase and was the value of the whole transaction. The City asserts, though, that where the individual properties are concerned, the actual consideration paid for the individual properties and the actual monetary value of the individual properties was not known. Because the total of the transaction did not represent the fair market value of each of the three properties added together, the City argues that it makes no sense to use the buyer's and seller's assigned value as the actual value.
Under Section 19-1403 of the Philadelphia Code, § 19-1403, a tax of three percent is assessed on the value of real estate transferred. "Value" is defined in Section 19-1402(14) as the following:
. . . .
(14) Value. . . .
(a) In the case of any bona fide sale of real estate at arm's length for actual monetary worth, the amount of the actual consideration therefore, paid or to be paid, including the liens or other encumbrances thereon existing before the transfer and not removed thereby, whether or not the underlying indebtedness is assumed and ground rents, or a commensurate part thereof where such liens or other encumbrances and ground rents also encumber or are charged against other real estate: Provided, that where such documents to be recorded shall set forth a nominal consideration, the `value' thereof shall be determined from the price set forth in actual consideration for the contract of sale;
(b) In the case of a gift of real estate where the transfer is not arms length, sale by execution upon a judgment or upon the foreclosure of a mortgage by a judicial officer, or upon a deed in lieu of foreclosure, transactions without consideration nor for consideration less than the actual monetary worth of the real estate, a lease subject to tax pursuant to § 19-1402(12)(b), an occupancy agreement, a leasehold or possessory interest, any exchange of properties, a transfer by merger, consolidation, or acquisition, a transfer effectuated pursuant to a plan of liquidation and dissolution, or the real estate of an acquired real estate company or family farm corporation, the actual monetary worth of the real estate as determined by adjusting the assessed value of the real estate, as determined by the Board of Revision of Taxes for City real estate tax purposes, for the common level ratio factor for the City as established by the State Tax Equalization Board: Provided, that the value of real estate transferred pursuant to a plan of liquidation and dissolution of a corporation or an association shall not include the proportionate value of the real estate which is attributable to securities or shares owned by persons who filed a Certificate of Transfer and paid Realty Transfer Tax upon the acquisition of the securities and shares;. . . .
(c) In the case of an easement or other interest in real estate the value of which is not determinable under clause (a) or (b), the actual monetary worth of such interest; or
(d) The actual consideration for or actual monetary worth of any executory agreement for the construction of buildings, structures or other permanent improvements to real estate between the grantor, the agent or principal of the grantor or a related corporation, association or partnership and the grantee existing before or effective with the transfer. (Emphasis in original. Footnotes omitted.)
Section 302 of the City of Philadelphia Regulations states, "In a bona fide sale of realty, the value of the realty is the total agreed consideration for the sale which is paid or to be paid. . . ."
The Board determined the value of the transaction under Section 19-1402(14)(a). The trial court affirmed this determination. The City concedes that First and Wachovia engaged in a bona fide real estate transaction. Under Section 19-1402(14)(a), the value used for realty transfer tax purposes in a bona fide transaction is the amount of the actual consideration. The regulation further defines the value in a bona fide sale of realty as the total agreed consideration. Here, there was a bona fide sale of realty. The agreed upon consideration was the book value of the three properties.
The City does not agree that Section 19-1402(14)(a) should have controlled. Rather, the City asserts that Section 19-1402(14)(b) is the proper section because it provides a method for valuing property where the actual consideration paid is not readily ascertainable. This Court is constrained to disagree. It is not contested that First and Wachovia engaged in a bona fide real estate transaction. The parties agreed that the consideration for the sale of all 147 properties was the sum of the book values of the properties. Similarly, the consideration for the sale of each of the three properties in the City was the sum of their book values. Under the terms of the sale, Section 19-1402(14)(a) was the proper section to use. The Board and the common pleas court did not err.
Alternatively, the City asserts that Section 19-1404(14)(c) applies because it is used in situations where the value of a transaction cannot be determined under clause (a) or (b). Because this Court has determined that the value was to be determined under clause (a), Section 19-1404(14)(c) is not applicable.
Accordingly, this Court affirms.
Because this Court has determined that the proper tax was paid, this Court need not address the City's argument that interest and penalties should be awarded.
ORDER
AND NOW, this 30th day of July, 2009, the order of the Court of Common Pleas of Philadelphia County in the above-captioned matter is affirmed.