PA tightens 89-11 transfer-tax loophole

A bipartisan effort led by state Sen. Jim Ferlo has sought to further close any possibility of major investors in real estate avoiding the real estate transfer tax.

While the 89-11 loophole was officially eliminated at the end of 2012, Ferlo touted a new provision that was added to the state tax code.

In a prepared statement, Ferlo said:

“I have been trying for several years to close the so-called 89-11 loophole which allowed companies to structure real estate transactions in two parts in order to avoid paying taxes on the sale. This year’s tax code clarified some definitions under the law and detailed the types of contractual relationship that trigger the collection of this tax. This effort levels the tax playing field.”

The 89-11 loophole got its name from a state law that enabled an investor to acquire 89 percent of the interest in the company that owns a property, then buy the remaining 11 percent of the company within three years. The deed-transfer tax only applies when 90 percent or more of the investment is transferred within three years.

Yet now the law has been changed to require investors who seek to buy real estate-owning holding companies in order to acquire real estate without a deed transfer to pay the tax anyway. According to Ferlo's office, a real estate company "must comprise 90 percent or more of the fair market value of the holding company's assets to trigger the tax."

According to Ferlo’s announcement, the Department of Revenue projects that the state’s 1 percent tax will raise $4.3 million in fiscal year 2013-2014 and $11.5 million in 2014-2015.

But the stakes may be even higher for local municipalities and school districts dealing with smaller budgets in which the sale of major properties can represent a significant budget gain or loss. And the closing of the loophole looks like it may be too little too late in terms of missing several major sales that already happened last year in Pittsburgh.

For the city of Pittsburgh, the realty transfer tax totals 4 percent, with 2 percent for the city and 1 percent for Pittsburgh Public Schools, along with the state’s 1 percent take.

And 2012 marked one of the biggest years in recent memory for blockbuster real estate transactions, with more than $340 million in known sales taking place using the 89-11 loophole for such major properties as EQT Plaza, K&L Gates Center, Del Monte Center and Washington Plaza, among others.

While the sales of the other buildings have become public in one way or another, the sale of the K&L Gates Center building has yet to be fully confirmed.

I did a back-of-the-napkin tabulation of the tax value of four of the major 89-11 sales of 2012 -- including two buildings on the North Shore (combined sales value: $83.8 million), Washington Plaza ($48.05 million), and the four apartment complexes Nationwide Realty Investors Ltd. sold to Morgan Properties (total projected sales value as part of a larger portfolio deal: $125.71 million) -- and came up with a potential realty transfer tax of $10 million in 2012 to be divided by the city, school district and state. That excludes the $91.2 million sale of EQT Plaza, which would've yielded $3.64 million in realty transfer taxes, as well as K&L Gates, the sales price of which remains unconfirmed.

A few years ago, city controller Michael Lamb told me the city typically generated between $11 million and $15 million each year in realty transfer taxes.

Ferlo praised the staff of Republican state senators Joe Scarnati, who serves the 25th district, Jake Corman, and Democratic colleague Vince Hughes, whose seventh district is in west Philadelphia.

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