No Prop. 13 tax dodge by Dell if Miramar Hotel had net lease

Net Net Net symbolMay 20, 2013

By Wayne Lusvardi

The last thing billionaire Michael Dell would have done if he wanted to avoid paying property taxes on his purchase of the Miramar Hotel in Santa Monica in 2005 was to buy a share of the operating company instead of the real estate.

But that is not how the Los Angeles Times is reporting Dell’s 2005 purchase of a share of the operating company of the Miramar Hotel for $200 million.  The Times reports Dell got away with an estimated $1.14 million property tax dodge due to a purported loophole in Proposition 13 for those who buy a part interest in a company.

The typical legal arrangement between a separate landowner and hotel operating company is a Triple Net Lease that shifts the payment of property taxes onto the tenant or operator and not on the landowner. According to Investopedia, a Triple Net Lease is:

“A lease agreement that designates the lessee (the tenant) as being solely responsible for all of the costs relating to the asset being leased in addition to the rent fee applied under the lease.  Structure of this type of lease requires the lessee to pay for net real estate taxes on the leased asset, net building insurance and net common area maintenance. The lessee has to pay the net amount of three types of costs, which how this term got its name.”

But Dell bought a 91.5 percent share of the hotel operating company anyway. And by doing so he probably incurred the obligation to pay $1.48 million in property taxes. Moreover, he did not avoid any additional property taxes due to a purported tax loophole in Proposition 13.

If a Triple Net Lease were in place in 2005 between the underlying landowner, Maritz and Wolff, and the hotel operator, Fairmont Hotel and Resorts, then buying a 91.5 percent share of the operating company would have resulted in Dell being obligated to pay property taxes instead of avoiding them.

Under a Triple Net Lease, Dell would have been obligated to pay 91.5 percent of the then existing $1,616,686 in property taxes on the property in 2005, which would have been $1,481,098. A Triple Net Lease makes the tenant or operating company, not the landowner, responsible to pay the property taxes.

“A Cheap Shot”

According to former County Tax Assessor Charles B. Warren in Pleasant Hill, California, there are two major competing legal structures for hotel ownership. One is full ownership and control of the marketing and reservations, the operations, and the real estate.

But more typical of a situation like the Miramar Hotel, where there is a separate landowner and a single hotel operator, is that there is a Triple Net Lease in place.

Warren said, “Many major hotels are, in effect, like a McDonald’s franchise. Sofitel, Hyatt and Westin provide the customers via their reservation platforms (like airline ticketing agreements) and may penetrate to some depth within the particular hotel operation to assure brand control.”  Warren elaborated that it was “definitely a cheap shot by the Times” to report Dell dodged taxes without confirming if there was a net lease in place.

We don’t know for sure what arrangements were in place for the Miramar Hotel in 2005 and neither does the LA Times. But it would have been unusual to not have a Triple Net Lease arrangement between a separate landowner and the hotel operator.

What is a Triple Net Lease?

In a Triple Net lease the tenant or building operator pays all the property taxes, insurance, and maintenance expenses and the landowner pays nothing.

This type of leases is also called a “NNN Lease,” which stands for “Net, Net, Net” or “Triple Net” signifying the following real estate expenses assumed by the tenant:

N — Property tax

N — Insurance

N — Maintenance

The rent the landlord receives from the tenant is pure net rent: the leftover rent after expenses are paid.

A Triple Net Lease arrangement between the landowner and the hotel operating company of the Miramar Hotel in 2005 would have looked liked this:

Miramar Hotel Operating Company — 42.5 %

Michael Dell MSD Portfolio Investments — 49.0%

Susan Lieberman Dell Separate Property Trust — 8.5%

Miramar Hotel LLC – Holding company

Property taxes, insurance, maintenance

Triple Net Lease
Underlying Landowner Ocean Avenue LLC (Maritz and Wolff, Inc) Net rent after expenses paid by tenant or operator

Times Underestimated Taxes

The Times additionally calculated the wrong property taxes on the Miramar Hotel property in 2005.

Anyone can look up the current property taxes on the Miramar Hotel online and adjust the tax backward 2 percent per year to estimate the property taxes in 2005 under the formula provided by Proposition 13. The City of Santa Monica also has all the financial data and property taxes for the Miramar Hotel available online.

The Times erroneously estimated the hotel property taxes as $860,000 in 2005. This was calculated by multiplying the $200 million purchase price for the business times Michael Dell’s 43 percent interest ($200,0000,000 x 0.43 = $86,000,000).

But by not also calculating his wife’s 49 percent interest, the amount of property tax assessment is underestimated and misleading. If Dell’s wife’s interest in the business is also calculated, then there would only have been only $70,000 of a supposed tax underpayment.

The Times says the property taxes should have been $2,000,000 based on a 1 percent tax rate applied to Dell’s hypothetical $200 million purchase of the hotel real estate in 2005.

If the Times’ mistake is corrected, the total 2005 property taxes on the Miramar Hotel were $1,618,686, not $860,000.  And Dell’s total 91.5 percent share of those taxes would have been $1,481,098.

If we assume that Dell should have bought the hotel property for $200 million (instead of the operating company for the same price), then Dell’s tax obligation would have been $2,230,770, not $2,000,000 as misreported by the Times.

But if there was a Triple Net Lease in place, then Dell would not have avoided taxes at all but assumed the obligation to pay the taxes when he bought the lion’s share of the hotel operating company.

The table below summarizes:

A) The Time’s erroneous calculation of property taxes Dell avoided: $1,140,000;

B) A corrected calculation of the taxes Dell would have dodged if he bought the business and there was no Net Lease: $0;

C) Dell’s share of the taxes if he bought the hotel business with a Net Lease: $2,230,770.

Estimated Taxes Avoided for Miramar Hotel Under Different Purchase Scenarios

Assessed Value Tax Rate Tax Dell Business Interest Total Property Tax 2005

(A)

LA TIMES ERRONEOUS ESTIMATED PROPERTY TAXES

(ASSUMING PURCHASE OF BUSINESS NOT REAL ESTATE – NO NET LEASE)

Estimated Property Taxes by LA Times $200,000,000 1.00% $2,000,000 N/A $2,000,000
Property Tax Est. by LA Times $86,000,000 1.00% $860,000 N/A $860,000
Est. Tax Avoided by Dell $1,140,000

(B)

LA TIMES ESTIMATED PROPERTY TAXES – CORRECTED
(ASSUMING PURCHASE OF REAL ESTATE ONLY – NO NET LEASE)

Estimated Property Taxes Incurred by Dell $200,000,000 1.219% $2,438,000 91.5% $2,230,770
Actual 2005 Prop. Tax Per Assessor $132,792,333 1.219% $1,618,686 91.5% $1,481,098
Est. Tax Avoided by Dell $0

(C)

ESTIMATED PROPERTY TAXES UNDER A TRIPLE NET LEASE
(ASSUMING PURCHASE OF BUSINESS ONLY)

Tenant Share – Miramar Hotel Op. Company(Dell) $200,000,000 1.219% $2,438,000 91.5% $2,230,770
Landowner Share $0 $0 $0 N/A $0
Est. Tax Avoided by Dell $0

 

2 comments

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  1. Donkey
    Donkey 20 May, 2013, 22:51

    Property taxes are too high for every piece of California land. 🙂

    Reply this comment
  2. Ted Steele, Navigator
    Ted Steele, Navigator 21 May, 2013, 09:30

    poor Duncey.

    Reply this comment

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