Howard County will reap an unexpected windfall because the buyer in one of the Baltimore region's biggest industrial sales declined to take advantage of a loophole and voluntarily paid a $1.9 million real estate transfer tax.
The Dec. 23 sale of three huge warehouses in the Gateway Commerce Center that together cover 2 million square feet produced the transfer and recordation taxes that the county and state will share. Local officials never expected to see a penny of it.
"We were all shocked," said county finance director Sharon Greisz, expecting that purchaser Invesco Real Estate of Dallas would have used the same loophole that made the sale of Columbia's village centers tax-free in 2002. Estimates were that government would have collected $2 million from that deal.
Instead of using the "controlling interest" loophole for the $97.1 million sale, Invesco, which manages a $19 billion portfolio for pension funds, bought the land and buildings outright and paid the taxes Wednesday. The buildings, on Snowden River Parkway close to I-95, house distribution operations for Sears Roebuck and Co., Giant Food and Jack and Jill Ice Cream, among others.
"I think it's great," said Howard County Executive James N. Robey. "So many real estate firms use the loophole. We're losing millions and millions of dollars."
To avoid the recordation and transfer tax, property ownership is transferred via the sale of one artificially created corporation to another, instead of directly selling the property that the corporations own. The corporate approach prevents the deal from being recorded in Circuit Court, which then does not trigger the taxes.
The practice isn't fair, Robey said, because ordinary people who buy a home have to pay the real estate taxes, and local governments need the revenues to pay for schools, roads and public safety services.
This time, though, Howard County gets to keep $1.4 million of the taxes, which budget director Raymond S. Wacks said "certainly makes a difference."
Under county law, the $971,000 in transfer tax will be divided among buying school and park lands, fire services, moderate income housing programs and agricultural preservation. The rest, $496,000 in recordation tax, goes into the general fund as surplus.
The commerce park was once part of 1,000 acres the Rouse Co. sold to General Electric for an appliance park. The rest of the land is divided between Gateway Office Park and Snowden Square shopping center.
County and state officials were puzzled about why the loophole was not used by Invesco, which bought the park from the Penrose Group Inc. of Vienna, Va.
Officials of the two firms involved in the sale did not return telephone calls, and David P. Scheffenacker, president of Preston Partners, the broker representing Penrose, declined to comment.
In other such transactions, large pension and insurance investors want to buy real estate without also buying partnership interests in other complex business entities. This time, that worked to the government's advantage.
The issue of whether businesses should be able to escape the transfer tax isn't new, and the battle is likely to recur this year in the General Assembly, said Michael Sanderson, legislative director of the Maryland Association of Counties.
Local governments want a state law to close the loophole and force companies to pay transfer tax on property worth more than $500,000, or at least report the transactions.
But legislation to close the loophole has failed nine times out of the past 15, said Ronald W. Wineholt, a former director of the state Department of Assessment and Taxation who is a lobbyist for the Maryland Chamber of Commerce.
Even tracking tax-free transactions can be complicated, he said, because partnerships often include slivers of entities all across the country.
The chamber opposes efforts to stop the practice, arguing that it represents "bad tax policy" and would impede business growth.
State Sen. Sandra B. Schrader, a Howard County Republican, also opposes changing the law.
"I think it's working just fine the way it is right now," Schrader said.
But not every Republican feels that way.
County Councilman Christopher J. Merdon of Ellicott City, a likely candidate for county executive in 2006, said he favors closing the loophole.
"I think it's only proper that people pay proper taxes," Merdon said, because the county needs money for infrastructure.
A Howard bill sponsored by Democratic Del. Elizabeth Bobo that seeks to close the loophole is opposed even by supporters of statewide legislation.
"I favor closing it on a statewide level, but not just in Howard County" to keep a level playing field in the state, Robey said.
Bobo disagreed, arguing that "it might be a good idea for Howard County to be out in front on things."