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Whose Property Is This Anyway – A Critical Recent Decision Affecting Tax Planning For Complex Real Property Transactions

Governments in recent years have developed some ingenious ways of financing huge real estate projects without having to front the money for it. One such method is so-called “ground lease financing” arrangements, in which private companies pay for the construction and then lease the improvements back to the government for some period of time. It’s a great way for governments to get new digs and spread out the cost, but it can lead to sticky questions when the taxman comes to collect.

Such issues were recently tackled by the Court of Special Appeals of Maryland in Townsend Balt. Garage, LLC v. Supervisor of Assessments of Balt. City, No. 2922, November 19, 2013. The wheels of the case were set in motion when the State of Maryland decided to build that big “BioPark” research complex in downtown Baltimore. As what typically happens in these ground lease financing deals, there was a mountain of leasing and subleasing arrangements in play, so try to bear with us here as we work through them…

To get the project off the ground, the State acquired some land from the City of Baltimore and leased it to UMB Health Sciences Research Park Corporation (“RPC”) – a tax-exempt non-profit organization created by the University System of Maryland – under a ground lease. RPC then subleased a parcel of the property Baltimore LSRP One Business Trust (“BLSRP”), a for-profit entity that agreed to finance and construct an office building and laboratory that would be leased back to the State of Maryland to house the University of Maryland, Baltimore, School of Medicine. Another parcel was subleased to Townsend Baltimore Garage, LLC (“Townsend”), another for-profit entity that agreed to finance and construct a parking garage.

Got that? Good, ’cause we’re not finished. As is typical for these arrangements, the contracts between the parties stated that the structures would – for good reasons not worth getting into there – be deemed owned by BLSRP and Townsend for income-tax purposes. Also, when it was all said and done, only about 85 percent of BLSRP’s office space and 25 percent of the parking garage was used for school purposes. (Stay tuned for why that it relevant.)

After the complex-commercial-real-estate dust settled, Baltimore City saw two operating for-profit entities and considered them a potential source for some tax revenue. The companies saw it differently. Land owned by the State is ordinarily exempt from the property tax under Tax Property Article § 7-210 when the property is not used in connection with a for-profit business (as set forth in § 6-102(e)). Because 85 percent of the office space and 25 percent of garage was for University purposes and not for profit, the companies argued that this portion of their tax liability was exempt under § 7-210.

The Tax Court found it persuasive that the leasing contracts deemed the companies the owners of the structures. Because ownership of improvements and property are typically considered the same for tax purposes, the Court therefore denied the claimed exemption for State-owned property. That analysis didn’t hold water when the case got up to the Court of Special Appeals, however.

In an opinion written by Judge Meredith, the panel applied its recent decision in Supervisor of Assessments of Balt. Cnty. v. Greater Balt. Med. Ctr., 202 Md. App. 282, 291-292 (2011). In that case, a charitable-use tax exemption (the Code-conscious can find this at Tax Property Article § 7-202(b)) that benefitted the record title owner was claimed by the “owner” of the improvements under a ground lease financing arrangement; that exemption was rejected by the county tax assessor. The Court found the answer in Tax Property Article §1-101, which states that real property constitutes land and the improvements on it, and Real Property Article §3-101, which requires transfers in ownership of property to be recorded. Therefore, for someone other than the record landowner to own the improvements, there must be some instrument of record conveying the title to them. Because the ground lease financing documents were not such instruments of record, the Court held that the record title owner was the owner of the improvements for tax assessment purposes, and the charitable-use exemption therefore applied.

In the present case, the Court likewise held that the ground lease financing documents weren’t instruments of record conveying the improvements to BLSRP and Townsend. Though BLRSP and Townsend may have been “contractual” owners in other contexts, the Court concluded, they weren’t relevant owners of the property for the purposes of the Tax Property Article. Therefore, the § 7-210 exemption applied, and Baltimore City couldn’t assess taxes on the portion of the companies’ property that didn’t have a for-profit use (i.e., 85 percent of the office space and 25 percent of the garage).

Likely also influencing the Court’s decision was the potential for indirect tax liability of the State and other governments in such ground lease financing arrangements. Companies in these deals can foresee the possibility that their for-profit activities could lead to run-ins with tax assessors. BLSRP’s lease therefore obligated the State, as the tenant, to pay additional rent equal to taxes assessed on the company. The Court wasn’t entirely comfortable with the prospect that governments entering these deals would have taxes passed through to them like this – particularly so, one would assume, where other governments are the ones doing the assessing.

The take-home point of Townsend Balt. Garage is that complex real-estate financing deals can present both hazards and benefits to governments and their private-sector partners when tax matters enter into play. Parties to the deal must carefully plan ownership to address tax issues – so make sure you’ve got a handle on it when analyzing the terms of any such agreement. Got any questions? Contact Bill Sinclair, head of STSW’s commercial litigation group, at 410-385-9116 or, or commercial litigation associate Chris Mincher at or 443-909-7505.

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