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California Court Rules on Transfer Tax


A California appeals court has ruled the purchase of real estate encumbered by a long-term lease is not subject to San Francisco’s documentary transfer tax if the lease has a remaining term of 35 years or more.


The Case


In 2009, the owners of a commercial building at 731 Market leased the ground floor to CVS for a term of 45 years. Once the lease was recorded with the City and County of San Francisco, a Real Property Transfer Tax was paid based on the value of the stream of rental payments due over the life of the lease.


In 2015, the building, including the CVS lease was sold. All terms of the original lease remained unchanged with a remaining term of more than 35 years. The owners paid a documentary transfer tax, then unsuccessfully sought a refund of the amount of tax it paid based on the value of the remaining stream of payments due over CVS’s lease.


The Ruling


The California Court of Appeal, First Appellate District, issued its decision in 731 Market Street Owner LLC v. City and County of San Francisco. The critical factor in determining whether the documentary transfer tax may be imposed is whether there was a sale that resulted in a transfer of beneficial ownership of real property.


California’s property law statute provides that, unlike the creation of a lease of more than 35 years, a transfer of property subject to a lease with a remaining term of more than 35 years is not a “change in ownership.”


The judgement states: “We conclude that the 2015 sale of the underlying property subject to CVS’s lease did not result in a change in ownership and therefore did not constitute 'realty sold' to trigger the transfer tax. San Francisco's assessment of a real property transfer tax on a commercial lease was an impermissible ‘double tax’ on the property.”