California explained further in early September in what circumstances it will treat the transfer of an interest in a solar project as a trigger to start collecting property taxes on the project. Solar generating equipment is effectively exempted from annual property taxes in California, but it becomes subject to such taxes if there is a sale of the project or change in control of the project company that owns the project after construction. Property tax rates vary by county. They can be as high as 2% of assessed value.
The State Board of Equalization proposed revisions to the property tax assessor’s manual and released a separate opinion letter on September 5 in response to questions from solar companies.
The assessor’s manual would say the following. The sale of a solar project or an interest in the company that owns the project during construction will not trigger property taxes. Entering into a tax equity transaction structured as a sale-leaseback within three months after the project is first placed in service or a partnership flip will not trigger property taxes. There is no deadline to enter into the partnership flip transaction. (An inverted lease does not trigger property taxes because it is not a sale of the project.)
However, property taxes will be triggered when a developer who has sold and leased back his project exercises an option to repurchase the project. There is a risk that the “flip” in a partnership flip transaction will trigger such taxes.
However, a board official said that was not the intention and said the language will be fixed.
The opinion letter clarifies how to determine whether there has been a change of control in situations where a project is owned through tiers of partnerships and a partner in an upper-tier partnership sells his interest. The letter says one should multiply the ownership interest that someone is acquiring by the percentage interest each partnership owns in the partnership below it down the ownership chain. Thus, for example, if D acquires a 10% interest in a partnership that owns 50% of another partnership that owns the solar project, then D acquired 10% x 50% = 5% of the partnership that owns the project. If D did not already own a large enough interest that, when combined with the additional 5% would increase its interest to more than 50%, then there is no change in control.
The board plans to use the same approach to determine whether there has been an indirect change in control of a corporation. The board’s guidance is not binding on local assessors who administer the property tax. The board is taking comments on the latest draft until September 25.
In a separate development, some California cities and counties are trying to collect real estate transfer taxes when a single-member limited liability company that owns real estate is transferred. The tax at the county level is 55¢ per every $500 in value, and cities within counties may impose an additional tax at half the county rate. The tax is triggered by recording an instrument transferring ownership of real estate. When an LLC is sold, nothing is recorded.
San Francisco amended its transfer tax ordinance in 2008 to require taxes to be paid after a sale of more than a 50% ownership interest in a single-member LLC that owns real estate despite the fact that no transfer instrument is recorded. (The sale will also trigger a reassessment for annual property tax purposes.) Los Angeles County has not amended its ordinance, but the county recorder interprets the existing ordinance to require a transfer tax to be paid when a controlling interest is transferred in a legal entity that owns real estate. The recorder says state law gives the county the right to collect taxes in such cases.