731 Market Street Owner, LLC v. City and County of San Francisco

Summary

731 Market Street Owner, LLC leased the ground floor of its commercial building to Garfield Beach CVS, L.L.C. (CVS) for a total term of 45 years. 731 Market sold and transferred the property to Jamestown Premier 731 Market, L.P. which included the lease with CVS. CVS maintained the existing lease, continued to possess the ground floor, and still had a remaining term of 35 years. 731 Market paid a transfer tax under San Francisco Business and Tax Regulations Code (Ordinance), then sought a refund for the portion of the tax attributable to the value of the leasehold interest. The trial court determined that the tax to the leasehold interest was not triggered because the transaction did not result in any "realty sold" under the Ordinance. San Francisco challenged the court's finding on appeal, contending the tax was proper and not an impermissible double tax on 731 Market because the leasehold fell within the Ordinance's definition of "realty sold."

Affirmed. Pursuant to Brown v. County of Los Angeles, San Francisco is authorized to impose a documentary transfer tax in connection with the recordation of deeds or other documents evidencing transfers of ownership of real property. The Ordinance also authorizes a tax at specified rates on each deed, instrument or writing by which any lands, tenements, or other realty sold within the City and County. Ordinance, Section 1102. Here, the Ordinance did not define "realty sold" but referred to state law for the definition. The panel reasoned that because the Ordinance was adopted pursuant to authority in Revenue and Taxation Code Section 11911 and employs provisions nearly identical to Section 11911, the controlling state law guiding the construction of the Ordinance was Section 11911 and cases interpreting it. Based on the holdings in Thrifty Corp. v. County of Los Angeles and McDonald's Corp. v. Board of Supervisors, the panel held realty sold was sufficiently similar to the phrase "change in ownership" when reassessing property for property tax purposes. It concluded that the underlying property subject to CVS's lease did not result in a change in ownership and therefore did not constitute "realty sold" to trigger the transfer tax.

— Khelya Okunor