For years, buyers of some of the most prominent properties near and in Downtown have exploited loopholes in state law to avoid paying deed transfer tax. Now the city school district has found a way to fight back, at least in some cases.
The district is starting to require developers who receive tax abatements for their projects to sign agreements promising that if the property is sold, they will not structure the transaction in a way that avoids payment of deed transfer taxes.
“If you have the benefit of a tax subsidy, then you ought to have an obligation to pay those taxing bodies what they are rightly owed,” district solicitor Ira Weiss said.
At the urging of the district, the city’s Urban Redevelopment Authority expects to include similar language in deals involving the sale of property for redevelopment of the former Civic Arena site, where developers will be eligible for 10 years worth of tax abatements.
“We are investors on behalf of the public in these transformational projects, and we need to assure that our collective investment objective of rebuilding our tax base is structurally protected,” said Kevin Acklin, URA board chairman and Mayor Bill Peduto’s chief of staff.
In the city, the transfer tax, paid on all property sold, is 4 percent, with 2 percent going to the city, 1 percent to the school district, and 1 percent to the state.
The district’s stance is a direct result of several high-profile cases over the last four years in which buyers took advantage of loopholes to escape paying millions of dollars in deed transfer taxes.
Perhaps the most notable involved the sale of the U.S. Steel Tower for $250 million in 2011. The group led by Mark Karasick, a New York City real estate investor, that bought the real estate technically purchased the company that owned it, not the property itself. With no deed transferring, the city, district and state lost out on $10 million in transfer taxes.
In such “89-11” transactions, a buyer acquires 89 percent of the interest in the firm at the time of the deal and the other 11 percent three years later. At the time, the transfer tax applied only if 90 percent or more of the interest was conveyed within three years.
Similar arrangements were used in 2012 to buy two North Shore office buildings — Del Monte Center and the Equitable Resources Building — for an estimated $52 million and $37 million, respectively, with the city, district and state missing out on about $3.5 million in transfer taxes.
They lost nearly $4 million more in the sale of the 32-story EQT Plaza to Highwoods Properties the same year. Highwoods bought the holding company that owned the company that in turn owned the building and no deed was recorded.
While those loopholes were closed in two pieces of legislation advanced by then-state Sen. Jim Ferlo and approved by the state General Assembly in 2012 and 2013, it didn’t end the efforts to avoid the tax.
Last year, GMH Capital Partners acquired the Cork Factory complex in the Strip District in a deal that city Controller Michael Lamb believes was worth “north of $100 million.”
However, because the acquisition involved two holding companies, transfer taxes were paid only on the assessed value — about $19 million for the Cork Factory apartment buildings and $1.6 million for a parking facility. That amounted to $822,193.
Janet Burkardt, a partner with Mr. Weiss in Weiss Burkardt Kramer LLC, said school board members are aware of such deals and want to protect the district where they can.
In cases of tax abatements, “They don’t want to give preferential treatment to someone who is going to work the system and get out of paying the transfer tax,” she said.
The first agreement the district reached involved Oxford Development Co.’s Three Crossings residential, office and retail project in the Strip District. Oxford was not involved in any of the deals in which the payment of transfer taxes were avoided “but we have to start somewhere,” Ms. Burkardt said. Oxford officials could not be reached for comment.
Each taxing body would have to approve its own such agreement with developers. Mr. Lamb said the city should include such language in all of the tax abatements it approves and that he will encourage it to do so.
“It’s a logical way for us to deal with the issue,” he said.
“When public monies are involved in these projects, we should ensure that we are getting our money when they are sold.”
In the district’s agreement with Oxford, deed transfer taxes would not have to be paid if the property is sold at sheriff sale, if a corrective deed is involved, or if it is sold in lieu of a foreclosure or in a judicial sale. The agreement runs for the 10-year period of the abatement.
Mr. Weiss said tax abatements under the Local Economic Revitalization Tax Assistance program are a natural vehicle to require agreements because they are becoming more popular tools with developers. If possible, the district also will require such agreements in cases involving tax increment financing.
Mark Belko: mbelko@post-gazette.com or 412-263-1262.
First Published: February 3, 2015, 5:00 a.m.
