SALES TAXES IMPACTING THE COMMERCIAL REAL ESTATE INDUSTRY

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1 Page 1 BACKGROUND The Department of Revenue (DOR) is undergoing a rule development process, and it is the understanding of the industry that the impetus behind this process is to provide clarity and certainty to those taxpayers impacted by Florida Administrative Code on Sales and Use Tax. Specifically, Rule 12A , regarding among other topics lease and license of real property a tax that is a unique burden to commercial property owners and tenants in Florida has reportedly not been modified since Its purpose is to clarify Florida Statutes (c) imposing sales tax for granting of a privilege to use or occupy real property. With the increased level of sophistication on commercial real estate transactions, and with the recent court decisions 1 impacting sections of this rule, the DOR thought it timely to conduct a rule development process for Rule 12A This has included workshops to obtain public comment in late 2011 and most recently on June 6, 2012, which this group has actively participated in. The issues of importance to the commercial real estate industry include rule changes to the utility calculations, lease terminations, tenant improvements, real estate taxes, progression of transactions, and billboard sections. Detailed comments from the industry on are contained in the attached Exhibit. Taxation of tenant improvements as if they are rental payment is the largest section of rule changes, and is of highest importance to the commercial real estate industry. From discussions with the DOR, it seems the drive behind this rule development process is a series of sophisticated and complicated commercial real estate transactions rendering uncertainty and inconsistencies when presented for review by DOR auditors. The DOR has offered assurances during the public comment workshops that the intent of the rule changes to the tenant improvement section would not impact transactions where the landlord extends a tenant improvement allowance, capital improvements in induce tenancy, or a turnkey tenant improvement project. Rather, the sales tax would apply to tenants funding and completing improvements. As examples, the DOR has had issue in defining consideration in deals such as (1) office condos, (2) single purpose LLCs with leaseback to the LLC, (3) real estate taxes paid by parceled tenants, (4) storage units in hotel settings for audio-visual services, and (5) a tenant constructing an improvement on a ground lease where no ground rent is given over a term, and the improvement reverts to the landlord at the end of the term. Even though there has been a level of increased sophistication in commercial real estate transactions over recent years, these five examples cannot be extrapolated as industry norm. It would be a great detriment to the wider industry to implement rules based on these very specific examples. The commercial real estate industry looks forward to continuing to provide valuable market feedback to the DOR regarding this extremely important rule development process. We look forward to demonstrating the impact of the rule language on job creation in our industry and economic recovery in Florida. ACTION REQUESTED Our industry is prepared to volunteer time and talent to work with the DOR in evaluating the proposed rule changes impact to our industry; we request that the DOR continue in dialogue with our industry. Our members are prepared to advocate at the executive, judicial and legislative branches to ensure economic vitality of our industry and job creation in our industry. 1 The controlling case law in Florida regarding imposition of sales tax on tenant improvements include Department of Revenue v. Seminole Clubs, Inc., 745 So.2d 473 (Fla. 5th DCA 1999) and Department of Revenue v. Ruehl No. 925, LLC, 76 So.3d 389 (Fla. 1st DCA 2011). Importantly, in the most recent decision, Ruehl, after a fact-intensive analysis, the court found that the tenant improvements did not qualify as taxable rent. In making this ruling, the court looked to several fact, including (1) a lease requirement to refurbish, (2) landlord required approval of the improvements, (3) minimum funding required to be expended on the tenant improvements, (4) the periodic or onetime nature of the improvement, (5) if the improvement was to bring the premises to suitable condition for occupancy, (6) the extent of landlord requirements for compliance with architectural or code concerns, (7) evidence rental rates would have been higher if the landlord would have funded the improvements, (8) evidence the transaction was structured to avoid taxation, (Ruehl, 2) (9) if the improvements were defined as in lieu of rent, or (10) if a credit would have been granted the landlord should the improvements not occurred (Ruehl, 3).

2 THE INDUSTRY S POSITION ON TAXATION OF TENANT IMPROVEMENTS AS PROPOSED Page 2 The commercial real estate industry warns against rule changes that create unfair double taxation Requiring every commercial property owner and prospective tenant to contemplate a transaction s economic substance to define tax implications is an undue burden and will require extensive administrative and professional costs to commercial real estate industry participants Imposing more taxes on our industry discourages job creation in a time when job creation is essential The proposed complicated analysis creates uncertainty when the intent should be to create certainty for the market The timing of this rule development is unfortunate, when the recession has evidenced a slow pace of recovery and our industry has received the brunt of the impact Consideration of impact to related taxation such as at the federal level, and impact to default language in leases and licenses is paramount Generalizing fact-specific analysis for application to a complex industry in whole does not render a fair and equitable taxation system Taxes added to previously-untaxed transactions severely impair the value and viability of commercial assets STATEMENT OF INTEREST The commercial real estate industry trade organizations contributing to this position paper, listed below, represent the third largest sales tax-paying base in the state of Florida, and nearly 6,500 members. These groups have a substantial interest in the rule language. The Building Owners and Managers Association of Florida represents over 1,500 members throughout the State of Florida. The organization includes owners and third party managers, as well as associate members servicing the commercial industry. (contact Lacey Willard at lacey.willard@cbre.com or ) Florida CCIM (Certified Commercial Investment Member) Chapter represents over 600 members across the state. These real estate professionals are recognized experts in the commercial and investment real estate industry. This elite corps of CCIMs includes brokers, leasing professionals, investment counselors, asset managers, appraisers, corporate real estate executives, property managers, developers, institutional investors, commercial lenders, attorneys, bankers, and other allied professionals. The membership of the Florida Gulfcoast Commercial Association of Realtors represent commercial real estate professionals in the Hillsborough, Pinellas, Polk, Pasco, Manatee, and Sarasota county areas in all commercial product types. The organization includes 500 members. ICSC (International Council of Shopping Centers) is the premier global trade association of the shopping center industry. Florida membership represents over 7% (3,850 members) of the entire 55,000 members in over 90 countries include shopping center owners, developers, managers, marketing specialists, investors, retailers and brokers, as well as academics and public officials.

3 Page 1 Exhibit A INTRODUCTION The intent of this Exhibit is to apply the policy considerations as outlined in the position paper above to the proposed changes to Rule 12A Although the commercial real estate industry will be tracking closely changes to other portions of the Rule such as utility charges ( 2(e)), lease termination fees ( 2(h)), Progression of Transactions ( 6(a)), and billboards ( 20 a)), at this time we offer comment to the following three sections: Tenant Improvements ( 2(i)), and Real Estate Taxes ( 2(d)). The proposed rule language is offered below in black, and our comments and suggested language updates are offered in the blue text. INDUSTRY S COMMENTS TO CHANGES TO RULE 12A (I) ON TENANT IMPROVEMENTS Rule 12A (i) 1. Real property improvements completed or funded by a tenant are never part of the total taxable rental consideration if the improvements are not required by the lease or license or permanently remain the property of the tenant. Trade fixtures that remain the property of the tenant are never part of the total taxable rental consideration. Concern #1 on the term by a tenant as it pertains to landlords: The Department of Revenue has offered assurances during the public comment workshops that the intent of the rule changes to the tenant improvement section would not impact transactions where the landlord extends a tenant improvement allowance, capital improvements in induce tenancy, or a turnkey tenant improvement project. Rather, the sales tax would apply to tenants funding improvements. To ensure complete clarity, our industry would recommend additional language after sentence one in line with: Real property improvements completed or funded by a landlord are never part of the total taxable rental consideration. Concern #2 on the term completed : It is the understanding of the industry from comments during public workshops that the intent of the rule changes in this section would not impact transactions where the landlord extends a tenant improvement allowance, capital improvements in induce tenancy, or a turnkey tenant improvement project; rather, the sales tax would apply to tenants funding and completing improvements. It is the recommendation of the industry to further clarify or delete the term complete in the excerpt completed or funded by a tenant from this section. It is market standard for lease or license terms to contemplate a tenant improvement allowance that may be utilized towards design and construction efforts completed by either the landlord or the tenant. In the circumstance of a tenant completing improvements under a tenant improvement allowance scenario, the rental rate in the lease or license is reflective of the allowance and the lease or license party completing the improvements should have no additional tax implications which would render an unfair double taxation scenario. Rather, the rule should be clarified to make certain it applies to the lease or license party who is funding the improvements, not completing the improvements. The commercial real estate industry warns against rule changes that create unfair double taxation. Concern #3 on the term required by the lease or license as it pertains to non-monetary elements: In the commercial real estate industry, leases and licenses are oftentimes drafted to reflect non-monetary elements that impact tenant improvements such as the aesthetic preferences of the landlord for the asset in order to maintain value, target credit worthiness of potential tenants, lending requirements imposed on the landlord on financed projects, code requirements imposed on the landlord by a local authority, development requirements imposed

4 Page 2 Exhibit A on the landlord by a local authority or other non-monetary elements that result in a definition of how tenant improvements will be handled in a lease or license. In fact, the court in Ruehl recognized improvements may be necessary to be consistent with the architectural requirements of the landlord, building codes, etc. (Ruehl, 2). These non-monetary reasons to require definition of tenant improvements in the lease or license, under the current rule drafting, may be interpreted to impose sales tax on those improvements. In fact, the improved market status of the asset due to these higher non-monetary standards imposed on leases and licensees reflects a higher rental rate that is already taxed, thereby imposing an unfair double tax if the tenant improvements are also taxed. The commercial real estate industry warns against rule changes that create unfair double taxation. Concern #4 on the term required by the lease or license as it pertains to extent of definition: The industry has concern regarding how extensively a tenant improvement must be identified in lease or license to qualify here. Simply because a tenant improvement is wholly or partially identified or required in a lease or license is not indicative of consideration of the monetary elements of the leases or license terms especially considering not all tenant improvements are scoped the same, with some having extensive build-out and some being only carpet and paint; considering the value and scope of these improvements are determined by the tenant and not the landlord; considering it is often the case that a lease or license clause is simply acknowledging a tenant s intention to complete improvements for which the landlord will not be responsible; considering the landlord may have interest in defining limited tenant improvement elements that work to maintain a property s code compliance, development agreement compliance, financing agreement compliance, or aesthetic consistency; and considering some leases or licenses loosely identify a tenant s right to install cabling, security, communications, or similar system within a tenant improvement section that do not constitute traditional tenant improvements, consideration, or privilege to occupy the space. The proposed complicated analysis creates uncertainty when the intent should be to create certainty for the market. Concern #5 on the term required by the lease or license as it pertains to extent of definition: The industry has concern regarding how extensively a tenant improvement must be identified in lease or license to qualify here. If a lease or license requires landlord consent or approval prior to proceeding with any tenant improvements completed and funded by the tenant, does taxation apply? There are many market and legal-based concerns driving a landlord to reserve the right to consent or approve tenant improvements such as protection from liens; protection from code violations; or assurance of consistency with the development, code, or design requirements. The proposed complicated analysis creates uncertainty when the intent should be to create certainty for the market. Concern #6 on the term permanently remain the property of the tenant as it pertains to restoration or waivers of restoration: The industry has concern regarding waivers of restoration. A landlord may grant a tenant a waiver of restoration thereby waiving any obligations of the tenant to restore premises to the condition at lease or license signing for many non-monetary reasons. For example, a waiver of restoration may reflect the negotiation power of the parties; it may reflect the un-removable nature of the tenant improvement such as paint; or it simply may reflect the market standard practices captured in a boilerplate lease or license without regard to monetary terms or tax implications. Imposing tax on a tenant improvement when these circumstances are present renders an unfair double taxation as the rental rate will have already reflected the negotiation power of the parties or market standard practices. The commercial real estate industry warns against rule changes that create unfair double taxation.

5 Page 3 Exhibit A Concern #7 on the term permanently remain the property of the tenant as it pertains to partial restoration and waivers of restoration: The industry has concern regarding partial waivers of restoration. It is the case in many leases and licenses that elements of the tenant improvement may be identified in the lease or license to remain property of the landlord at the end of the term, and some elements of the tenant improvement may be identified in the lease or license to remain property of the tenant at the end of the term. Is then only the portion of the tenant improvement remaining property of the landlord at the end of the term determined to be consideration? If so, this is an extreme administrative and cost burden on the lease or license parties to separately account for these differing elements in the lease or license drafting process as well as in the construction process. Concern #8 on the term permanently remain the property of the tenant as it pertains to the usefulness of second plus generation space: It seems that save the specific examples the Department of Revenue has offered (describing a tenant constructing an improvement on a ground lease where no ground rent is given over a term, and the improvement reverts to the landlord at the end of the term) in the vast majority of circumstances, there is speculative, no, or even negative usefulness of a tenant improvement at expiration of the lease or license term. Because it is the tenant controlling the scope of improvements and not the landlord, no assurances are available to the landlord that these improvements will render direct or indirect value to a speculative future tenant. It is true for office, retail, industrial, and non-core commercial real estate assets that it is rare to capture a potential tenancy whose space requirements match exactly those of the vacated prior tenant. In fact, abandoned tenant improvements allowed through waivers of restoration or simply inherited are required to be demolished in large part by subsequent space requirements of a new tenant or by code. Therefore, tenant improvements that remain the property of the landlord in actuality are not a benefit but a detriment to the landlord. This is true for a landlord for both financial reasons, such as funding the cost of demolition, and for marketability reasons, when inheriting an unaesthetic, inefficiently designed, or otherwise unmarketable tenant improvement. Further, the lack of clarity and speculative nature of valuation of these improvements at the time of lease or license transaction makes it impossible for the parties to include the improvements in the bargained-for consideration. This is an example of where generalizing fact-specific analysis for application to a complex industry in whole does not render a fair and equitable taxation system. Rule 12A (i) 2. Tenant improvements required to be completed by the lease or license and that become the property of the landlord are not part of the total taxable rental if: Concern #9 on the below-required subparts: In the Ruehl decision, the court mentions several facts 2 presented by the parties, utilized in the analysis of the taxable nature of the transaction, including: (1) a lease requirement to refurbish, (2) landlord required approval of the improvements, (3) minimum funding required to be expended on the tenant improvements, (4) the periodic or onetime nature of the improvement, (5) if the improvement was to bring the premises to suitable condition for occupancy, (6) the extent of landlord requirements for compliance with 2 It is important to note that the Ruehl decision is based on facts available to the court for purposes of deciding that particular case. Although precedent-setting in the jurisdiction of the appellate court, the salient facts available to the court may not be indicative of salient facts that would be presented in every office, retail, industrial, or non-core commercial real estate transaction. The industry believes that a casual transfer of the facts available in Ruehl or even Seminole into factors intended for application to every commercial real estate transaction would be inappropriate and detrimental. Uncertainty is created when irrelevant or too-farreaching factors are imposed on transactions that are varied and specialized, and the industry warns against creating uncertainty in the market.

6 Page 4 Exhibit A architectural or code concerns, (7) evidence rental rates would have been higher if the landlord would have funded the improvements, (8) evidence the transaction was structured to avoid taxation, (Ruehl, 2) (9) if the improvements were defined as in lieu of rent, or (10) if a credit would have been granted the landlord should the improvements not occurred (Ruehl, 3). However, prior to offering these factors, the court in Ruehl recognized a blanket application is not justified. (Ruehl, 1). There are ten factors delineated by the court in Ruehl, and no preference was indicated for any one of these factors. It is of major concern to the industry that the Department of Revenue has: Chosen one of these ten factors as mandatory in the determination of taxation ( required by the lease or license ); Added another factor not mentioned in the most recent case law on point as mandatory ( permanently remain the property of the landlord ); Chosen six more factors for inclusion as subparts (if the improvement was to bring the premises to suitable condition for occupancy; minimum funding required to be expended on the tenant improvements; if a credit would have been granted the landlord should the improvements not occurred; if the improvements were defined as in lieu of rent but adding without apparent case law support rent, additional rent, rent-in-kind here; evidence rental rates would have been higher if the landlord would have funded the improvements; and evidence the transaction was structured to avoid taxation); Then excluded the remainder of the factors (landlord required approval of the improvements; the periodic or onetime nature of the improvement; and the extent of landlord requirements for compliance with architectural or code concerns). By voicing this concern, the industry is not suggesting that all factors need be mandated or included in subparts or even included at all. Rather, this is an example of the proposed complicated analysis creating uncertainty when the intent should be to create certainty for the market. Concern #10 on the below-required subparts: There is no evidence from review of either the Ruehl or Seminole case decisions that the elements listed in this proposed rule were intended as a set of conditions that, if applicable, would require taxation. In fact, the court stated in Ruehl a blanket application is not justified. (Ruehl, 1). The Ruehl and Seminole case decisions offered fact-specific analysis intended to narrowly define the taxable nature of the transactions presented in these cases. Creating criteria listing such as the one presented in the proposed rule, that every commercial real estate transaction must follow to properly determine for the parties the tax implications, is in the industry s opinion an overstatement of the court holdings. Further, as evidenced by the detailed set of concerns contained in this Exhibit, a rule that demands too extensive subjective analysis for the parties, the market, and the Department of Revenue auditors is difficult to interpret, difficult to apply, and difficult to comply with. Requiring every commercial property owner and prospective tenant to contemplate a transaction s economic substance to define tax implications is an undue burden and will require extensive administrative and professional costs to commercial real estate industry participants. Concern #11 on the below-required subparts: In the event a rule development process continues with the framework of criteria listing, the industry strongly recommends adding language such as if any one of the following conditions apply to this section, and adding the term or as a connective. This will better reflect the presentation of factors within the court holdings as one of several factors leading to a determination of the taxable nature of a tenant improvement.

7 Page 5 Exhibit A Rule 12A (i) 2(a). the improvements are made in order to put the premises in a condition suitable for the operation of the tenant s business, Concern #12 on the term suitable : This subpart is referenced in Ruehl as a factor the court used to distinguish the facts from Seminole. However, using the term suitable outside of a factspecific judicial analysis is problematic. Is it the tenant, the landlord, the Department of Revenue, or even the market who is determining what constitutes a suitable condition? Requiring every commercial property owner and prospective tenant to contemplate a transaction s economic substance to define tax implications is an undue burden and will require extensive administrative and professional costs to commercial real estate industry participants. Further, a rule that demands too extensive subjective analysis such as outlined here is difficult to interpret, difficult to apply, and difficult to comply with for the parties, the market, and the Department of Revenue auditors. Concern #13 on the term to put the premises in a condition as it pertains to the timing of the tenant improvements: The Ruehl holding mentions the periodic nature of the tenant improvements as a factor in determining the taxable nature of the transaction in the same sentence that is offered in this subsection of the rule. It is unclear to the industry why the periodic nature factor used by the court was selectively not incorporated into the rule. Most tenant improvements are completed and funded at lease or license commencement or within a reasonable timeframe thereafter. It is unclear from the language proposed, however, if tenant improvements completed subsequent to this timeframe would be subject to a taxation analysis. The proposed complicated analysis creates uncertainty when the intent should be to create certainty for the market. Rule 12A (i) 2(b). there is no requirement to spend a specific or minimum amount of money on the improvements, Concern #14: The court in Ruehl stated: Just because a lease provision contemplates the expenditure of funds by a tenant does not make that expenditure rent. (Ruehl, 2). Depending on the circumstances of the transaction, and taken in conjunction with the remainder of concerns listed in this position paper, this factor may be reasonable or problematic. Expenditure of a specified sum by a tenant, without specificity as to scope, as required by a lease or license, does not necessarily leave the landlord with an improvement that is valuable at the term of the lease or license. It may be that the lease or license is specifying an amount solely for the purpose of creating an expectation as to the level of quality of tenant improvement that is not intended as a factor in consideration or as a taxable event. Rule 12A (i) 2(c). there is no credit given against rental payments, Concern #15: This subpart requirement was referenced in Ruehl as one of the factors that the court used to distinguish it from Seminole. This seems to be an element distinguishing Ruehl from Seminole rather than a mandatory element of analysis the court is referencing. In practice, in many commercial leases and licenses, it is not common for the tenant to receive an actual credit for the value of its leasehold improvements against the rent payments due under the lease or license. However, the language as presented in the rule may be interpreted as any credit delineated in the lease or license. It could also be interpreted to cover imputed credits that the

8 Page 6 Exhibit A DOR may impose. Lease and license credits are expansive and can be offered in a commercial real estate setting for a number of reasons interruption of service, unspent landlord-funded tenant improvement allowances, common area maintenance calculations, violation of lease or license terms, etc. It is not clear from the language offered that the credit pertains solely to tenant improvements funded by the tenant where the improvements would remain the property of the landlord, as outlined in the remainder of the proposed rule. The proposed complicated analysis creates uncertainty when the intent should be to create certainty for the market. Rule 12A (i) 2(d). the improvements are not classified as rent, additional rent, rent-in-kind, or in lieu of rent, Concern #16 on the terms rent, additional rent, rent-in-kind : The Ruehl court referenced the term rent in lieu, however, did not reference classifying the improvements as rent, additional rent, or rent-in-kind. This language is problematic, when taken in consideration with the other concerns outlined in this document, for landlords who wish to preserve default rights through reference to approval of tenant improvements funded by the tenant as rent. Tying default rights to those lease and license elements termed rent is a common practice in commercial real estate lease and license drafting. Forcing taxation on classification of all lease or license references to tenant improvements as rent, thereby forcing lease and license redrafting on all default provisions, places an undue burden on the commercial real estate industry. Further, this places lease and license terms in a position of untested drafting, exposing the parties to uncertainty. Further yet, requiring changes in definition to lease terms may impact federal taxation reporting. The proposed added language creates uncertainty when the intent should be to create certainty for the market. Concern #17 on the classifier: The Ruehl court referenced the term rent in lieu, however, did not require that improvements be classified by any lease or license party in any manner. This factor could be problematic. There is no indication on who conducts the classification: the landlord, the tenant, the Department of Revenue, or the market. Further, the parties have no control over how the other accounts for the tenant improvements in its internal accounting system. Generally accepted accounting principles are oftentimes but not always followed depending on the requirements of the landlord or tenant entity. However, when operating under generally accepted accounting principles, an entity is required to capitalize and depreciate an improvement over the life of the lease or license; but many tenant bookkeepers will account for the cost of the improvement as rent, because it has been standard to do so. The proposed added language creates uncertainty when the intent should be to create certainty for the market. Rule 12A (i) 2(e). there is no evidence the improvements provide an economic benefit to the landlord based on the useful life of the improvement compared to the term of the lease, and Concern #18 on the term economic benefit : The industry s first concern here is that this term, economic benefit, is not referenced or utilized in the Ruehl case decision. Although the court mentions as a factor evidence rental rates would have been higher if the landlord would have funded the improvements, imposing the term economic benefit is perhaps the most problematic of the factors for the commercial real estate industry to interpret. The term economic benefit can be construed to apply to monetary or financial deal terms such as rental rate, free rent, leasing commission structures, tenant improvements, credits, or the like. Or it can be a more subtlydefined portion of the deal terms such as those contributing to maintaining long term value of the asset such as preserving the aesthetic components of the asset, the development

9 Page 7 Exhibit A requirements, or code requirements. These latter terms merely maintain the value of the asset for the long term, requiring compliance with design standards, and do not render an enhanced value or benefit to a landlord. In the circumstance where a landlord includes these non-monetary or financial terms, the rental rate in the lease or license is already reflective of the requirements which if imposed would render an unfair double taxation scenario. The commercial real estate industry warns against rule changes that create unfair double taxation. Concern #19 on the term economic benefit : Further, in these challenging economic times where occupancy rates continue to fall, rental rates continue to decline, where Florida continues to track in the top three states of delinquency on mortgage payments on CMBS product, and foreclosures continue to be backlogged, where commercial real estate construction jobs are again decreasing 3 it is difficult for the market itself to define economic benefit. Requiring every commercial property owner and prospective tenant to contemplate a transaction s economic substance to define tax implications is an undue burden and will require extensive administrative and professional costs to commercial real estate industry participants. Concern #20 on the term economic benefit : This term is even further complicated as the economic benefit to a landlord of a tenant improvement is not determined at the time of transaction, or even during the course of the lease or license term. Rather, the true economic benefit is evident when and if a landlord is able to convert the usefulness of the tenant improvement to another, subsequent tenancy for value (as value is defined under Fla. Stat Sec (1)(c)). This benefit, in fact, may be a detriment if the landlord would be required to fund demolition of the tenant improvement prior to realizing a full depreciation. Imposing a requirement to then hire an appraiser, expert witness, or consultant to evaluate this depreciation schedule for each tenant improvement is overly burdensome to the taxpayer. Further, the timing of realizing any economic value is complicated in the event of eviction. As a matter of policy, the landlord should be able to terminate the lease or license if the tenant fails to pay its rent, or is otherwise in default, without the possibility that the State will impose a tax on it. The industry has concern that under the proposed rule, it seems that an eviction could create a taxable event to the landlord. From the reading of the language offered, it is not clear as to the DOR s intended timing of the supposed benefit (at substantial completion; at default; at occupancy of subsequent tenancy utilizing the improvements, etc.) nor the scope of the supposed benefit (rather than defining as a simple leasehold covenant creating incidental benefits). Requiring every commercial property owner and prospective tenant to contemplate a transaction s economic substance to define tax implications is an undue burden and will require extensive administrative and professional costs to commercial real estate industry participants. Rule 12A (i) 2(f). there is no evidence that there was an attempt to reclassify rental payments to avoid the tax. Statement: The industry agrees that in an ordinary arm s length commercial lease or license transaction, there should not be any evidence that there was an attempt to reclassify leasehold improvements as rent. Notwithstanding that agreement, a catchall provision this expansive 3 The state [of Florida] lost 9,200 construction jobs over the month, far more than any other industry. Over the year, Florida's already depressed construction sector shed 24,500 more jobs, more than any other state. (

10 Page 8 Exhibit A creates extensive uncertainty in the industry. The proposed complicated analysis creates uncertainty when the intent should be to create certainty for the market. Rule 12A (i) 3. Tenant improvements required to be completed by the lease or license that become the property of the landlord and do not meet the conditions in subparagraph 2 are taxable as part of the total rental charged. Tax is due on the consideration received.

11 INDUSTRY S COMMENTS TO CHANGES TO RULE 12A (D) ON TAXATION OF AD VALOREM TAXES Rule 12A (d). Page 9 Exhibit A The industry recommends updating the last line of this rule to reflect that ad valorem taxes are not taxable. The commercial real estate industry warns against rule changes that create unfair double taxation. Rule 12A (e). The industry recommends updating the first line of this rule to reflect that common area maintenance charges paid by the tenant are not taxable. The commercial real estate industry warns against rule changes that create unfair double taxation. The industry recommends that CAM charges are not taxable if they are otherwise exempt by statute or Constitutional provision or are exempt by provisions of this Rule. The commercial real estate industry warns against rule changes that create unfair double taxation.