731 Market Street Owner, LLC v. City and County of San Francisco
Facts: The owner of a building leases the ground floor to a tenant under a long-term lease. The landlord paid the city a transfer tax on the value of the leasehold when a memorandum of the lease was recorded. The owner sells and transfers all their rights in the property, subject to the outstanding leasehold interest. The lease agreement creating the leasehold interest remains unchanged. The owner pays the city a transfer tax in connection with the sale, with part of the tax based on the present value of rent payments due over the life of the lease. The owner submits a claim to the city for a refund of the amount attributed to the leasehold interest, which is denied.
Claim: The owner seeks a partial refund, claiming the transfer tax on the value of the leasehold interest in the property was double taxation since their sale did not change the existing 35-year leasehold interest and thus no change in ownership of the leasehold interest took place to be taxed.
Counterclaim: The city claims they are entitled to a transfer tax on the full value of the leasehold interest since the lease assignment constituted a sale of the leasehold.
Holding: A California court of appeals holds the owner is entitled to a refund for the portion of the transfer tax paid on the value of the leasehold interest since the sales transaction did not result in any change in ownership of the leasehold interest, just in the fee title which was sold subject to the outstanding leasehold interest. [731 Market Street Owner, LLC v. City and County of San Francisco (June 18, 2020)_CA6th_]
