Update on New Hampshire Real Estate Tax

Last June we penned an article in regards to the New Hampshire Department of Revenue Administration (DRA) and their application of the New Hampshire Real Estate Transfer Tax (RETT). That article can be found here (New Taxation Looms: NH Real Estate Transfer Tax and the Ground Lease). At the time we wanted to let our customers and clients know that their past experience on the taxation of real estate transfers may have changed as it relates to ground leases.

The RETT, as you know, in New Hampshire is 1.5% of the total value of the transaction customarily split equally by both parties. So if you sell a piece of land for a bank to building a branch, both parties would split the fee. Historically leased office, industrial, retail or land has not been taxed under the RETT, however last year the discussion was raised that some ground leases were being taxed. So if instead of a selling that land to the bank you lease it to them, there was discussion that you would have to pay a tax.

For the most part people believed that the threshold for no tax versus tax was 99 years of leasing. Because at 99 years, you basically are selling the asset. However the DRA in their interpretation of the rules, believed the cut off to be 30 years, and almost all ground leases are over 30 years.

Now in this legislative session a new bill has been proposed that would insert into law that only ground leases over 99 years would be subject to the tax. (http://www.gencourt.state.nh.us/legislation/2015/SB0232.html) For those landlord’s who have ground leases or those tenants who are around our state’s airports and for many other users of land, this is a large deal. As of the writing of this article we do not have a scheduled date for the hearing on the Bill.

Written by Chris Norwood, NAI Norwood Group, cnorwood@nainorwoodgroup.com. 

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