When the Rouse Co. sold 11 of its Columbia shopping centers to a New York firm this year, it didn't deal them away outright. Instead, Rouse set up a separate corporation, with the shopping centers as the main assets, and sold its controlling interest in that company.
It sounds like an obscure, technical difference. But it saved Columbia-based Rouse and Kimco Realty Corp. an estimated $2 million in tax payments to the state and Howard County, according to the Maryland Department of Assessments and Taxation. By exchanging the corporation -- and not the shopping centers themselves -- the two companies found a perfectly legal way to avoid paying transfer and recordation taxes. Without an actual property sale, no deed was transferred. No deed transfer, no transfer tax.
An increasing number of commercial real estate deals are done this way, tax officials said, depriving Maryland and local governments of more than $40 million a year. In 2001, three of the largest real estate deals in the state, which involved properties assessed at a total of more than $274 million, did not incur transfer or recordation taxes, according to state tax officials.
Now, as the state faces a $1.3 billion shortfall next year, lawmakers are trying to close what they say is one of Maryland's largest tax loopholes.
"We need every dime we can get our hands on, and this is money that rightfully ought to be coming into state and local treasuries," said state Sen. Brian E. Frosh (D-Montgomery).
In the legislative session that begins next month, he plans to reintroduce a bill that would require companies to pay the transfer tax when properties valued at more than $500,000 change hands through the sale of a company's interests. Similar versions of the bill have failed. And the legislation did not get out of committee this year, Frosh said, because of lobbying pressure by the real estate industry in an election year.
F. Patrick Hughes, legislative chairman of the Maryland chapter of the National Association of Industrial and Office Parks, said the measure died because it is a bad bill that discriminates against commercial property owners.
In corporate sales that do not involve real estate, Hughes said, such items as client lists, furniture and equipment are not taxed. "If you sell any other business in the state of Maryland -- a law practice, barbershop, a pizza store -- you are not subject to a transfer tax on the assets of those businesses." Real estate should not be taxed either, he said.
The bill would not close a loophole, he said, but effectively create a tax increase that could force companies such as Kimco to look elsewhere for shopping centers to acquire. "You don't raise taxes when the economy is so tight," he said. "If these businesses aren't bought and sold, they sit there and rot."
Miles Cole, a senior vice president of the Maryland Chamber of Commerce, said the bill is just an effort "to reach out and tax somebody" and could impede efforts to lure businesses to the state.
"When companies are looking to make a deal, they don't go to the place with the highest taxes and most complex laws," he said.
But with real estate prices rising, Frosh said, large corporations are increasingly creating what he called shell companies to dodge taxes. Other states, such as New York and California, have enacted laws similar to the one he is proposing. It's a matter of fairness, he said, because ordinary residents have to pay the tax every time they buy or sell a house.
Sean Dobson of Progressive Maryland, a nonprofit alliance of unions and advocacy groups, said the companies are exploiting a loophole to "get out of paying their fair share."
"It's semantics," he said. "Instead of calling it a sale of property, they say it's the sale of a corporation, when really, it's the same thing. . . . Most of these companies don't need the help."
Maryland's transfer tax is 0.5 percent of the property's sale price. Many counties also impose their own transfer taxes. In Howard and Montgomery, which like many counties also charge a fee to record a new deed, the tax is 1 percent of the sale price.
If passed, the bill would generate nearly $10 million a year for the state and about $32 million for counties, according to an analysis done by the Department of Assessments and Taxation.
That money is often a substantial revenue source for local governments, especially in the Washington suburbs, where the real estate market is booming. Howard earmarks the $20 million in transfer taxes it receives each year for school construction and low- and moderate-income housing, said Raymond S. Wacks, the county's budget director. The recordation tax raises an additional $14 million, he said.
"It seems that now every time a piece of commercial property is sold, that's the way the sale is taking place," he said. "So we're concerned."
In addition to the shopping centers, several major properties have changed hands through corporations and thus avoided the taxes. Among them are office buildings in Columbia Gateway, a high-end office park.
Montgomery Mall was assessed at $178 million when the controlling interest of the company that owned it was sold in 1994. If transfer and recordation taxes had been paid, Montgomery County would have received almost $2.5 million, and the state nearly $900,000. More recently, the Shady Grove Professional Center, valued at $90 million, changed hands without the taxes being paid.
Because there are no deed changes, the deals are not recorded in local land records.
That makes it difficult for assessors to do their job, said Laura Foussekis, assistant to the director of the Department of Assessments and Taxation. Her office is charged with assessing property values, which determine the amount of taxes paid. When fewer land sales are recorded, it is hard to know what surrounding properties are worth.
Her staff members have resorted to sleuthing through companies' quarterly reports, learning about major deals on the business pages of newspapers and even following rumors they hear on the street. Sometimes they do not learn of a transaction until the new owner calls to give a change of address.
Still, she said, "there are a ton of these that we don't know about."