North Shore building sale brings in no transfer tax
December 18, 2012 5:00 AM
Del Monte Center, a six-story office building on the North Shore.
By Mark Belko Pittsburgh Post-Gazette
For the second time this month, a major office building in Pittsburgh has been sold without a penny of deed transfer tax being paid, costing the city, the school district and the state millions of dollars in revenue.
The latest sale involves Del Monte Center, a six-story office building on the North Shore that was one of the first to be built as part of the development between Heinz Field and PNC Park.
KKR & Co. LP, a global investment firm based in New York, has acquired the property for an estimated $52 million through an "89-11" transaction that will allow the firm to forgo the payment of the 4 percent deed transfer tax in the city, the Post-Gazette has learned.
The 270,619-square-foot building was purchased from a partnership led by Continental Real Estate Cos., the Columbus, Ohio-based developer hired by the Steelers and the Pirates to oversee development between the two stadiums.
In an email, Barry Ford, president of development for Continental in Pittsburgh, confirmed that the company had sold "a portion" of its ownership interest in the Del Monte building to KKR. He would not say what portion.
"We are certainly proud of the work we have done on the North Shore and the millions of dollars this building in particular has generated for our city. The fact that a firm the quality of KKR is investing in Pittsburgh and on the North Shore is a great indicator for our region," he said.
KKR, which last year acquired Del Monte Foods, a tenant in the building, had no comment.
The transaction was completed only weeks before a Jan. 1, 2013, change in state law that will prevent real estate buyers from using 89-11 transactions to avoid the deed transfer tax.
In such transactions, a buyer -- instead of purchasing a property outright -- acquires 89 percent of the interest in the company that owns it. After three years, the buyer will purchase the other 11 percent.
Real estate sales are currently subject to the tax only if 90 percent or more of the interest is transferred within three years.
With the change in the law, if it is clear that more than 90 percent of the interest will be transferred after three years, the transaction will be subject to the tax.
Ira Weiss, solicitor for Pittsburgh Public Schools, said he believes the timing of the Del Monte sale was driven by the change.
"I can't say that I'm terribly surprised. Any time there are reasonable steps taken to amend the transfer tax laws to cover obvious transfers of real estate, you have these developers and financial people taking every advantage to avoid them," he said. "There's no question that this was an attempt to get on the last train out of town."
City Controller Michael Lamb, who has been fighting to close loopholes in the deed transfer tax law, agreed. "We had a sense that this might happen to try to get deals done by the end of the year," he said. "That points to the problem we've had with these arrangements all along. They clearly are set up as a mechanism to avoid the tax."
A $52 million sale would have generated $2.1 million in transfer tax, half of which would have gone to the city and the remaining half split between the school district and state.
Another North Shore property owned by the Continental partnership, the Equitable building, reportedly is being sold to IRA Realty Capital, a real estate and investment management company based in Newport Beach, Calif., in another 89-11 transaction.
Mr. Ford declined to comment. Amer F. Kasm, a principal and co-founder of IRA Realty Capital, could not be reached for comment.
The six-story, 179,137-square-foot Equitable building has been under agreement to IRA Realty. It reportedly is being sold for $31 million, plus about $7 million in prepayment penalties. Without an 89-11 deal, the sale would generate about $1.5 million in deed transfer taxes for the city, school district and state.
Mr. Weiss noted both properties benefited from the millions of dollars in taxpayer-funded public infrastructure investment made on the North Shore in support of development between the stadiums.
"That's precisely the unfortunate irony in these cases. These developers come to the taxing bodies, extract concessions from them in the way of tax increment financing and other devices, then turn around and put a dagger in the back of these taxing bodies when they have a chance," he said.
"It's kind of a slap in the face," Mr. Lamb said.
While the Steelers and the Pirates hired Continental to develop the land between the stadiums, they do not receive any money from the sale of the Del Monte or Equitable buildings.
The North Shore properties aren't the only ones being sold without paying deed transfer taxes.
Earlier this month, Raleigh, N.C.-based Highwoods Properties, the owner of PPG Place, acquired the 32-story EQT Plaza office building on Liberty Avenue, Downtown, in a $99.2 million deal.
The transaction did not involve the payment of deed transfer tax because Highwoods did not buy the property itself but bought Liberty Avenue Mezzanine LLC, a Delaware-based holding company that owned the company that, in turn, owned the skyscraper.
Highwoods has said that it had no choice but to buy Liberty Avenue Mezzanine, which was set up in January 2005, rather than the property itself. With the transaction, the city, school district and state lost out on nearly $4 million in transfer tax revenue.