Swap and Drops are going the way of the Sony Walkman player, except instead of functional obsolescence, “entity sales/transfers”, aka “LLC drop-downs” aka “Swap and Drops” will be legislated into extinction by the Ohio Legislature.
Thanks to our friends at Porter Wright Morris & Arthur LLP: Michael G. Reed & Mark A. Snyder for bringing this to my attention to then bring to yours.
For the first time, a bill has been introduced in the General Assembly to curtail the transfer and property tax planning techniques known as “entity sales” or “LLC drop-downs.” Model legislation was previously drafted, but it had not been introduced. The county auditors’ association has made this type of legislation a top priority for 2020.
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House Bill 449 was introduced on December 17, 2019 by Representatives Green and Skindell. It would apply the conveyance fee tax to transfers of a controlling interest in a pass-through entity that owns real estate. If enacted, transactions involving real estate where there is a “qualifying transfer” would be required to remit the tax to the county auditor within 30 days.
In addition to conveyance fees being owed, reporting these types of transfers could also result in increased property taxes because school districts will inevitably review these filings and file Board of Revision (BOR) complaints to increase values.
For purposes of this potential legislation, a “qualifying transfer” would mean a transfer involving more than 50% of the ownership interest in a pass-through entity which owns real property. A “qualifying transfer” may occur in one transaction or a series of transactions. Transactions that occur within one year of each other would be considered a series of transactions. This could be a nightmare to keep track of. It’s not yet clear “how much” real estate the entity subject to the equity transfer would have to own – potentially, any real estate.
The information required on this statement would include:
If not paid by the transferor, the conveyance fee plus a penalty could be charged by the county auditor and added to the property tax lien for the property owned by the pass-through entity.
This proposed legislation would also cause many pass-through entity transactions to become discoverable in the public record, including in situations in which avoiding the conveyance fee was not a principal reason to use an equity interest sale.
So what’s at stake here? Certainly the transfer taxes are of issue, because that is the only true benefit of the entity transfer, however, the larger issue here – the lead that’s buried in the details, is that if the sales price has to be disclosed, regardless of the type of transaction – a drop down or a traditional real estate sale – then immediately the property taxes will be appealed, which will then negatively effect the value of the real property being conveyed.
What does this mean for you, the property owner, investors, managers, principals and developers? If you’ve recently been toying with the notion of a sale, thinking it might be something of interest, but kind of on the fence about it, now would be the time to ask me for a complimentary opinion of value; because if you wait much longer the value of your property will be negatively effected by this legislation. The question of, “How do you underwrite property taxes?” will become null and void because the answer is going to be the same: 100% reassessment is how!
Again, if you have considered selling your property and would like a complimentary, confidential broker opinion of value, please reach out to me and we’ll be happy to provide one.
Thanks to our friends at Porter Wright Morris & Arthur LLP: Michael G. Reed & Mark A. Snyder for bringing this to my attention to then bring to yours.
For the first time, a bill has been introduced in the General Assembly to curtail the transfer and property tax planning techniques known as “entity sales” or “LLC drop-downs.” Model legislation was previously drafted, but it had not been introduced. The county auditors’ association has made this type of legislation a top priority for 2020.
* * * * *
House Bill 449 was introduced on December 17, 2019 by Representatives Green and Skindell. It would apply the conveyance fee tax to transfers of a controlling interest in a pass-through entity that owns real estate. If enacted, transactions involving real estate where there is a “qualifying transfer” would be required to remit the tax to the county auditor within 30 days.
In addition to conveyance fees being owed, reporting these types of transfers could also result in increased property taxes because school districts will inevitably review these filings and file Board of Revision (BOR) complaints to increase values.
For purposes of this potential legislation, a “qualifying transfer” would mean a transfer involving more than 50% of the ownership interest in a pass-through entity which owns real property. A “qualifying transfer” may occur in one transaction or a series of transactions. Transactions that occur within one year of each other would be considered a series of transactions. This could be a nightmare to keep track of. It’s not yet clear “how much” real estate the entity subject to the equity transfer would have to own – potentially, any real estate.
The information required on this statement would include:
- the total amount paid to the transferor as consideration for the ownership interest,
- the portion of the total that its attributable to real property located in the county and owned by the entity,
- the percentage of the ownership interest in the entity being transferred, and
- for the real property transferred, that entity’s percentage of ownership (e.g., tenancies in common owned by multiple entities or persons).
If not paid by the transferor, the conveyance fee plus a penalty could be charged by the county auditor and added to the property tax lien for the property owned by the pass-through entity.
This proposed legislation would also cause many pass-through entity transactions to become discoverable in the public record, including in situations in which avoiding the conveyance fee was not a principal reason to use an equity interest sale.
So what’s at stake here? Certainly the transfer taxes are of issue, because that is the only true benefit of the entity transfer, however, the larger issue here – the lead that’s buried in the details, is that if the sales price has to be disclosed, regardless of the type of transaction – a drop down or a traditional real estate sale – then immediately the property taxes will be appealed, which will then negatively effect the value of the real property being conveyed.
What does this mean for you, the property owner, investors, managers, principals and developers? If you’ve recently been toying with the notion of a sale, thinking it might be something of interest, but kind of on the fence about it, now would be the time to ask me for a complimentary opinion of value; because if you wait much longer the value of your property will be negatively effected by this legislation. The question of, “How do you underwrite property taxes?” will become null and void because the answer is going to be the same: 100% reassessment is how!
Again, if you have considered selling your property and would like a complimentary, confidential broker opinion of value, please reach out to me and we’ll be happy to provide one.