Sale of campus in Cranberry involved no real estate
Deal for Westinghouse complex saved on tax
When the 823,979-square-foot campus of Westinghouse Electric Co. in Cranberry changed hands in January, the blockbuster transaction did not involve any actual real estate. Instead, the company that owned it was sold — a legal maneuver that saved hundreds of thousands of dollars in deed transfer taxes.
To the seller, Columbia Property Trust, the transaction followed the mandates of state law.
To skeptics, it amounted to another loophole exploited to cut the amount of taxes owed.
“The reality is that every time the Legislature closes a loophole, the real estate community finds another. They are halfway around the world before the Legislature is out of bed and has its socks on,” said Ira Weiss, solicitor for the Pittsburgh Public Schools, who acknowledged that the transaction appeared to fit the provisions of state law.
Columbia Property Trust provided the explanation regarding the multimillion-dollar transaction in a March 6 letter sent to
Cranberry and Seneca Valley School District.
The letter came in response to questions raised by the township and the school district about why there was a discrepancy between the announced $180 million sales price and the $145.4 million price listed in the deed transfer report.
The limited liability companies sold in the transaction were created in the days leading up to the sale.
That led Pittsburgh Controller Michael Lamb, who has fought to close loopholes in state law that allowed commercial property owners to avoid deed transfer tax, to wonder whether the LLCs were set up for the sole purpose of selling the real estate.
“You just can’t allow some entity to create these constructs just for the purpose of ducking the tax. It’s not right. They should be fully investigated on this,” he said.
Jerry Andree, Cranberry township manager, has asked the state Department of Revenue to look into the transaction to determine if the proper amount of deed transfer tax was paid.
“I think they did use what you may call loopholes in the law to do this, but if it’s a legitimate loophole, I guess that’s why they hire tax lawyers,” he said. “Our overall goal is to make sure they are in full compliance with the real estate tax provisions.”
Jeffrey Johnson, spokesman for the state Department of Revenue, said he cannot comment on specific transactions because of taxpayer confidentiality laws.
“In cases where the sale price is drastically lower than the computed fair market value, the department will request additional information from the parties to determine the appropriate amount of tax was paid,” he explained.
Cranberry has estimated that it and Seneca Valley School District have each lost out on $175,000 in deed transfer taxes and the state $350,000 because of the discrepancy between the announced sale price for the Westinghouse property and the price listed in the deed transfer report.
At the $145.4 million price, Cranberry and the district still are set to receive $727,000 each in transfer taxes, and the state will get $1.4 million. The township and the district each split 1% of the 2% tax, and the state gets 1%.
The technical details
According to public documents, Columbia Property Trust created subsidiaries CF Cranberry LLC and CF Cranberry Holdings II LLC related to the Westinghouse property that it then sold to the new owner, identified in mortgage documents as Fortress Credit Advisors LLC
Fortress Credit appears to be related to Fortress Investment Group, a New Yorkbased global investment manager.
Both the CF Cranberry and CF Cranberry Holdings subsidiaries were created several days before the sale was announced.
In the letter to the township and school district, Debbie J. Newmark, senior director, corporate compliance and transactions for Columbia Property Trust, said no deed “was delivered to the purchaser in connection with the transfer of the Westinghouse campus.”
“A real estate owner has the choice of transferring ownership by delivery of a deed or by a sale of the entities which own the real estate (the “acquired companies”) to a new purchaser,” she wrote.
In this case, the “sale of the Westinghouse campus was accomplished by conveyance of membership interests in the acquired companies,” Ms. Newmark explained.
In Pennsylvania, in situations where 90% or more of a real estate entity is sold, the deed transfer tax is based on the “computed value” of the real estate held by the acquired company, not the price paid for the acquisition of the company itself.
The “computed value” is based on the assessed value of the real estate involved multiplied by the so-called common level ratio, a number calculated by the state to adjust assessed values so they more closely equate to market value.
In her letter, Ms. Newmark said a full deed transfer tax was paid “based upon computed value in accordance with the laws of the Commonwealth.”
“Pennsylvania law mandates this result,” she added.
Ms. Newmark didn’t say why the parties involved decided to go that route rather than selling the property outright.
Bud Perrone, a spokesman for Columbia Property Trust, said the company had no comment beyond what was contained in the letter.
Brian Raznick, identified in the Columbia Property letter as counsel for the purchaser, did not return phone calls.
‘French to me’
Mr. Andree said he turned to the state for help because he does not have the expertise at the local level to delve into the nuances of the transaction.
“It’s like reading French to me,” he said. “I have no knowledge of the Pennsylvania state law. We had to reach out to someone who understood it and can peel back the layers.”
Mr. Lamb said the “computed value” formula used to calculate the deed transfer tax works to the advantage of buyers and sellers in a county like Butler County, which hasn’t had a property reassessment since 1968.
As a result, the assessed values typically are lower than actual market value, he noted. “If the county were reassessed last year, they probably wouldn’t go through this construct,” he said.
The method appears to be similar to one used in the sale of the Cork Factory Lofts apartment complex in the Strip District to Philadelphiabased GMH Capital Partners in 2014.
In that case, no deed transfer was recorded. Instead, a declaration of acquisition was filed with the state Department of Revenue showing the purchase of two holding companies.
That type of transaction resulted in the deed transfer tax being paid on the assessed value of the property, not the actual sales price, which was not disclosed. The way the deal was structured prompted complaints from Mr. Lamb, Mayor Bill Peduto and then-Councilwoman Natalia Rudiak.
Adding even more mystery to a big-money saga that has had more twists and turns than a Kennywood roller coaster, Ms. Newmark, in her letter, lists the buyer of the Westinghouse campus as CF Reactor LLC, which was created two months before the sale.
Neither the deed transfer report nor the mortgage document that identified Fortress Credit included the name CF Reactor LLC.
“It is so weird,” Mr. Andree said, adding he expects that will be part of what the state Department of Revenue will review.
The loophole hunt
Public officials have been trying for years to close loopholes in state law that allowed buyers of commercial real estate to avoid paying deed transfer tax.
An amendment to the state tax code was approved in 2012 that eliminated one of the more common practices — so-called “89/11” transactions.
In such deals, a buyer — instead of purchasing the property itself — acquired 89% of the interest in the company that owned it. After three years, the buyer purchased the other 11%.
Before the change in the law, such deals were considered property sales subject to the tax only if 90% or more of the ownership interest was transferred within three years.
The technique was used most notably in the sale of U.S. Steel Tower in 2011 to a group led by New York real estate investor Mark Karasick for $250 million. By structuring the deal that way, the group did not have to pay $10 million in deed transfer taxes.
According to one local real estate attorney, the method used in the Westinghouse deal became more common after “89/11” transactions were eliminated.
Former state Sen. Jim Ferlo led the charge to close the “89/11” loophole. He said he was not surprised by the way the Westinghouse transaction was structured.
“We always anticipated that someone would outthink us, come up with something new,” he said.
Since 2007, the owner of the Westinghouse campus has been receiving abatements on township, school district and Butler County real estate taxes.
In 2006, officials calculated that the taxes abated amounted to about $1.3 million annually, although that likely has increased over the years, Mr. Andree has said.
The Westinghouse property will be back on the tax rolls in 2022. Completed in 2009, the campus houses executive offices, research and development, and support functions, as well as amenities such as a bank branch, a cafeteria, and tennis, basketball and volleyball courts.