Doing Deals in Florida


 

 

 

 

Lawyer: Michael Berke
Firm: Akerman Senterfitt
E-mail: michael.berke@akerman.com
Telephone: 305-755-5855
Location: One S.E. Third Avenue, 25th Floor, Miami, Florida 33131
Website: www.akerman.com
I. Tax Benefits in Florida.
1. Florida is one of the few states that does not impose estate, inheritance, gift, income, intangible or generation skipping taxes upon its domiciliaries.

2. As a result, ad valorem taxes on real estate are higher than in some states. However, the “Save our Homes” amendment to the Florida Constitution caps tax assessment increases on homestead property (defined below) at 3% or the rate of inflation, whichever is lower.

II. Asset Protection Benefits in Florida.
Florida law also affords its domiciliaries a significant level of creditor protection.

1. Florida’s Homestead Exemption laws protect the home of a Florida resident from forced sale in order to satisfy the claims of creditors. In order to be entitled to the homestead protection, the domiciliary must:

(a) intend to permanently reside in Florida. F.S. 196.015

(b) have legal or beneficial title to the real property as of January 1;

(c) make the property his/her permanent residence or the permanent residence of others who are legally or naturally dependent upon such person. F.S. 196.031(1)

(d) the residence must be owned by a natural person and not by an entity. However if the property is owned by a revocable trust, it will be treated as though owned by a natural person; and

(e) Homestead protection is subject to acreage limitations. If the residence is located in a municipality, homestead protection is limited to ½ acre. If the residence is located outside a municipality, homestead protection is limited to 160 contiguous acres.

2. There are situations when homestead protection is not applicable. A forced sale of homestead property is permitted to enforce:

(a) payment of ad valorem taxes;

(b) obligations contracted for the improvement or repair or labor performed on the property; and

(c) Limitations imposed by the Bankruptcy Act of 2005, Section 522(p)(i), which limits the homestead exemption to $125,000 (now $136,875 due to inflation adjustment) for homestead real property that a debtor acquires within 1,215 days immediately preceding his/her voluntary or involuntary bankruptcy petition.

3. Other Assets Exempt from Creditor’s Claims.

(a) Life Insurance proceeds are exempt from creditors of the insured unless the insurance policy or a valid assignment provides to the contrary (F.S. 222.13);

(b) Cash Surrender Value and Annuities are exempt (F.S. 222.14);

(c) Money or other assets payable from a qualified retirement or profit sharing plan are exempt (F.S. 222.21);

(d) Medical savings accounts and college trust fund plans or plans established under the Internal Revenue Code Section 529 are exempt (F.S. 222.22); and

(e) Tenants by the entireties property is exempt. In Florida, a tenancy by the entireties is a form of ownership that exists when title to property is held jointly by the husband and wife. Creditors of either the husband or wife cannot reach property held as a tenancy by the entirety. In order for creditors to attach property held as a tenancy by the entirety, the creditor must be a creditor of both the spouses. However, the protection afforded as tenants by the entirety is not available against an IRS tax lien.

III. Transfer Taxes.

There are three relevant transfer taxes.

A. Documentary Stamp Taxes on Deeds (“Deed Tax”) – This tax is imposed on deeds and other instruments transferring an interest in real property. The tax is 0.7% (1.05% in Miami-Dade County on non-residential property) of the consideration given for the Deed. If consideration other than money is given, the tax base is the value of the property.

B. Documentary Stamp Tax on Mortgages (“Mortgage Tax”) – A mortgage tax of 0.35% is imposed on mortgages and assumptions of mortgages based upon on the amounts secured. The mortgage tax is also imposed on any increase of the debt secured to the extent of the increase.

C. Non-recurring Intangible Tax (“Intangible Tax”) – An intangible tax of 0.002% is imposed on mortgages based upon the lesser of the amount secured or the value of the property. The intangible tax is also imposed on any increase in the debts secured to the extent of the increase, unless the tax base has been limited to the value of the property. The intangible tax is imposed on assumptions only when the assumption is coupled with an increase in the debt and a release of the original obligor.

If a new lender makes a loan that pays off an old loan, the Mortgage Tax and Intangible Tax are imposed on the new loan. However, if the new lender purchases and modifies the old loan, then the Mortgage Tax and Intangible Tax are due only on the new money.

D. Special cases regarding the Deed Tax.
1. If the title is taken by foreclosure, the Deed Tax is based on the amount bid at the foreclosure sale.

2. If title is taken by a deed in lieu of foreclosure, the Deed Tax is based on the amount of debt forgiven.

3. In a “short sale,” the Deed Tax is based on the amount of the sale, not on the amount of the debt forgiven.

4. Transfer of Equity Interests.

a. Because a Deed is not recorded when equity interest are sold, local property appraisers are not aware that the property has changed hands and that the property should be reassessed for ad valorem tax purposes. F.S. 193.1556, which became effective July 2008, now requires that the buyer must file a Form DR-430 with the local property appraiser to notify local property appraisers of any change of ownership or control in the property.

b. While the Statute was clearly intended to apply to “off record” transfers of real estate assets, it has also had the unintended consequence of capturing typical “M and A” transactions which involve operating companies that may own real estate in Florida.

c. Failing to comply with F.S. 193.1556 incurs significant penalties.

(i) If the Property Appraiser determines that the real property was underassessed for any year within the prior 10 years, the Property Appraiser can reassess the value of the property and the property owner will be liable for the taxes avoided.

(ii) The property owner may be charged interest at 15% per annum on the taxes avoided plus an additional penalty of 50% of such taxes.

(iii) The property appraiser may record a tax lien against the real property for the taxes avoided.

(iv) If the property is no longer owned by the party that failed to report the change of control, a lien can be recorded against any other Florida real property owned by that entity.

5. “Drop and Swap” Transactions.

a. Parties often avoided the payment of the Deed Tax by conveying property to a newly formed entity and transferring the equity interests in the entity to a buyer, in a so-called “Drop and Swap” transaction.

b. F.S. 201.02(1)(b) (effective as of July 1, 2009) ended the “drop and swap” technique. The new law deems an entity to which real property is conveyed for less than full consideration to be a conduit entity. The Deed Tax now applies to all transfers within 3 years after the initial conveyance from the grantor of all or any portion of the grantor’s direct or indirect ownership interest in the entity based upon the consideration paid.

E. Special Cases Regarding Multi-State Mortgages.

1. Florida requires that a legend be placed on the cover of any multi-state mortgage recorded in Florida. There are 2 variations on the legends:

a. A legend used in a true multi-state mortgage where the legal descriptions of all the mortgaged properties, including non-Florida properties, are attached to all the mortgages to be recorded in Florida. (“Format 1″)

b. A legend used when the mortgages to be recorded in Florida will describe only the Florida properties. (“Format 2″)

2. The taxable base for calculating the Mortgage Tax depends on which format is used. The taxable base for calculating the Mortgage Tax on Format 1 is based on the ratio of the value of the Florida collateral to the value of all of the collateral multiplied by the amount of the loan. In Format 2, the taxable base is the greater of the amount determined by the formula above or the value of the property to be mortgaged in Florida.

3. The Intangible Tax is based on the lesser of the value of the Florida real property collateral (excluding leasehold mortgages) or the amount secured multiplied by the percentage that the Florida real property bears to the value of all collateral.

4. However, if the lender agrees to limit the amount of recovery on the Florida real estate, the limitation amount becomes the Mortgage Tax base. The limitation does not change the Intangible Tax calculation, but if the calculation based on the limited amount is less than the tax base calculated above, the Intangible Tax is reduced.

IV. Fractured Condominium Projects

As the condominium market in Florida remains in turmoil due to the economic recession, lenders holding unsold residential condominium units as collateral are increasingly enforcing their security interest in these units and acquiring them via foreclosure, and then either conveying these units to another entity in a bulk sale, or selling these units to individual buyers (sometimes through another entity owned or controlled by the lender). Investors are also increasingly seeking to acquire unsold units in bulk with the intent of leasing or selling them to individual end users. These lenders and investors may be subject to the obligations and liabilities of a “developer” by being deemed a “successor developer” pursuant to Chapter 718, Florida Statutes (the “Condominium Act”) and the related rules and regulations promulgated by the Division of Florida Land Sales, Condominiums, and Mobile Homes (the “Division”).

A. Who is a “Developer”?

1. Florida Condominium Act defines a developer as one “who creates a condominium or offers condominium parcels for sale or lease in the ordinary course of business”. Thus, there are 2 classes of developers: those who create a condominium and record the condominium documents and those who offer condominium units for sale or lease in the ordinary course of business. A foreclosing lender or bulk purchaser acquiring units in an unsuccessful condominium project must weigh the consequences of becoming a “successor developer”.

2. For filing purposes, the Division defines “ordinary cause of business” as “selling or leasing more than 7 units per year in a condominium containing at least 70 units and 5 units per year in a condominium containing less than 70 units”. It is not clear that this definition is applicable to a “Successor Developer” for any other purpose.

3. If the acquirer is not offering units for sale, but only operating a leasing program (i.e. leases for less than 5 years), it will be exempt from the necessity of filing a successor Prospectus, but will lose the ability to control the Condominium Association, as discussed below.

B. Advantages of becoming a Successor Developer.

Frequently the Declaration of Condominium reserves for the benefit of the developer the following rights:

1. to perform alterations to units without the approval of the Condominium Association.

2. to maintain model units.

3. to maintain a sales office and a leasing office.

4. to be excluded from restrictions on leasing.

5. to be excused from the payment of assessments on developer-owned units by paying any deficit in operating expenses after collecting assessments from other unit owners.

6. to transfer units without affording the association the right of first refusal.

7. to elect or designate individuals to the Board of Directors and thereby control the Board.

C. Disadvantages of becoming a Successor Developer.

Becoming a successor developer may subject a foreclosing lender or bulk purchaser to the following disadvantages:

1. claims for prior management of the condominium association such as the failure to fund association deficits and reserves.

2. the responsibility for the deposit amounts paid by contract buyers pursuant to pending unit purchase agreements with the original developer and the duty to return all of the monies in the event a contract buyer properly rescinds the purchase and sale agreement regardless of whether said deposit monies were actually expended by the original developer for construction.

3. the responsibility for preparing an estimated operating budget for the condominium.

4. the responsibility for funding reserve accounts for capital expenditures and deferred maintenance.

5. liabilities for representations made by the original developer to buyers of units.

6. liability for the common law implied warranty of fitness and merchantability as to construction.

7. liability for statutory implied warranties under F.S. 718.203.

8. liability for any false or misleading information contained in the original developer’s condominium documents.

9. liability for latent defects.

D. Control of the Condominium Association.

1. If the acquirer of title to unsold units did not obtain an Assignment of Developer Rights from the original Developer, the transfer of all of the unsold units by foreclosure or bulk purchase automatically triggers a “turnover event”. Upon a turnover event, the acquirer loses the right to elect a majority of the directors to the Association’s Board. In addition, the acquirer will be obligated to pay assessments on the units purchased, and will have no right to determine the level of assessments or the items for which assessments are imposed.

2. Turnover may be avoided if the foreclosing lender or bulk purchaser receives an Assignment of Developer’s Rights. If such assignment is not obtained and if the acquirer becomes a successor developer by offering units for sale, it is unclear whether it may vote its units to elect a majority of the directors of the Association (assuming the acquirer holds title to more than 50% of the voting interest of the Condominium)/

F. Tax Consequences.

A bulk purchaser of condominium units who holds the units only for rent, may be able to claim capital gains treatment upon the eventual sale of the units. However if the acquirer becomes a “Successor Developer” and attempts to retain control of the Association by offering units for sale, it may be deemed a dealer thereby subjecting the acquirer to ordinary income tax treatment upon the eventual sale of the units.

G. Conclusion.

There is little case law to give guidance in this area. While achieving certain goals, a foreclosing lender or bulk purchaser acquiring units in an unsuccessful condominium project may unintentionally assume significant liabilities. Before the lender or purchaser takes title to units in a Florida distressed condominium project, a careful analysis should be undertaken so that the acquirer’s goals can be achieved without incurring unintended consequences.

Because of the uncertainty regarding the rights and obligations of successor developers, it is anticipated that there will be proposed legislation submitted this legislative session to clarify these issues.

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