Tax change may spur sale of key Pittsburgh properties
A change in the state's tax code could spur owners of some large Downtown and North Shore buildings to try to sell them before the end of the year, experts say.
A loophole known as “the 89-11 transaction,” which enables buyers to avoid paying state, municipal and school transfer taxes, ends on Jan. 1, the result of changes the Legislature adopted this year.
At least three buildings — Del Monte Center, the North Shore's largest office building; the Equitable Building on the North Shore; and the 242-unit Pennsylvanian apartments — are listed for sale and have drawn interest from buyers, real estate agents say.
“There probably will be some sales made before the end of the year under the 89-11 tax, and I know of five buildings where that could happen,” said Jack Norris, managing director of CBRE Inc., declining to identify them.
In such a transaction, the seller conveys 89 percent of its interest in a real estate corporation that owns a property, rather than conveying the property itself, and the buyer has the option of exercising the remaining 11 percent after three years.
Starting next year, if more than 90 percent of the ownership interest in a real estate transaction will transfer after three years, the state will consider the deal a taxable transaction, said Stephen Bruder, chief of staff to Sen. Jim Ferlo, D-Highland Park, who led the action to eliminate the loophole.
Investors never were bashful about using the tax loophole.
Developer Jim Scalo, CEO of Burns & Scalo Real Estate Services Inc., said he used the rule, describing it as “buying ‘shares in a partnership interest,' versus buying the real estate traditionally via a deed transfer.”
In addition to the tax break, another benefit is that “the sale remains quiet,” Scalo said.Developers claim that by not paying transfer taxes, they can acquire a property at a lower price.
Yet Pittsburgh Controller Michael Lamb said it cost government entities much-needed revenue.
“The change is definitely a step in the right direction to provide tax fairness for the city of Pittsburgh and municipalities and school districts across the state,” Lamb said.
The rule applied most recently in the sale of the 388-unit Washington Plaza apartments in Uptown. No deed was recorded because the buyer, Faros Properties Inc. of New York, acquired the seller's interest in WP Partners, which owned the complex.
Another notable 89-11 transaction: the 2011 sale of the 64-story U.S. Steel Tower, the city's tallest office building, for $250 million. Mark Karasick, a New York City real estate investor, headed a team that acquired the building but paid no transfer taxes.
The state Department of Revenue ruled the U.S. Steel Tower sale — in which ownership of the building was set up as a real estate company — was an 89-11 transaction. That meant the city could not collect $5 million in taxes and the state and Pittsburgh Public Schools each lost out on $2.5 million.
After Jan. 1, the state tax code will still exempt transfer tax payments when a buyer acquires a property under a “deed in lieu of foreclosure.”
A lender who holds the mortgage on property facing foreclosure can convince the borrower to avoid foreclosure by returning the mortgage and all documents. The lender can then sell the mortgage to another borrower. No real estate transfer taxes are required when the deed is transferred.
Aaron Stauber, president Rugby Realty and one of the largest property owners Downtown, acquired the former Downtown headquarters for Westinghouse Electric Corp., a building now known as 11 Stanwix, in June 2008 by purchasing a note that was in default, Stauber has said.
In June 2011, when Stauber sold the building in a traditional real estate deal to GLL Real Estate Partners Gmbl for $66.7 million, Pittsburgh got $1.3 million in transfer taxes and the city school district and state each received $666,250.
In Pittsburgh, the deed transfer tax requires 2 percent of the sales price to go to the city, 1 percent to its school district and 1 percent to the state. Most municipalities have a 1 percent tax, but a few go as high as 2 percent.
Sam Spatter is a staff writer for Trib Total Media. He can be reached at 412-320-7843 or email@example.com.