New Taxation Looms: NH Real Estate Transfer Tax and the Ground Lease

Presently, whenever a property is bought or sold in New Hampshire, the buyer and the seller traditionally equally split the Real Estate Transfer Tax (RETT) of 1.5%. We are accustomed to this tax when a property is transferred, if we are buying a house, a piece of land, or a commercial building. However a new rule change by the Department of Revenue Administration (DRA) could broaden the definition of what constitutes a transfer to also include shorter term ground leases.

Ground leases are a common transaction type in the State. Many banks and other retail properties, have buildings that are constructed on leased dirt. Additionally, around many of the state’s airports there is land that is also on leased land. Typically these leases and their option periods have terms that go from 30 years or more, which in lies the rub. The DRA’s proposal is to modify the current rule, which allows them to tax ground leases of 99 years or more, and lower that bar to 30. Specifically the transfer tax rate shall apply to:

802.01 ( j ) “The transfer of a lessee interest in a ground lease (including any interest of the lessee in the related improvements) that provides for a term of 30 or more years when all options to renew or extend are included, whether or not any portion of the term has expired.”

New Hampshire currently has the highest RETT in New England and also gets a strong majority of its tax base from the normally collected real estate taxes by our cities and towns. This new tax will be an additional burden not only on those property owners, but on the banks and gas stations that use the land.

Traditionally new taxation comes about through the legislative process. Our elected officials draft and review. However this new tax comes as part of a rule change. With rule changes, the process is a bit different: the rule is proposed, public comments are made, it is voted upon by the Joint Legislative Committee on Administrative Rules (JLCAR) and then goes into effect. Presently we are awaiting for the JLCAR vote on the rule. This is a group of our legislators who, unlike in a normal legislative process, can only offer a thumbs up or thumbs down vote. No amendments or other public input shall be offered at vote. At the time of this writing that hearing and vote is scheduled for July 17, 2014.

Questions still arise on this new proposed taxation: how will the value of the ground lease be determined; when will the tax be collected; how will it be policed; and does the DRA have the authority to broaden the definition of what is considered a transfer? All of these questions will need to be brought to light in order to truly understand what impact this will have on landlords and tenants.

For further questions on this issue, please visit the DRA’s website or call us.

Written by Chris Norwood, NAI Norwood Group