Transfer taxes are often one of the largest transaction costs in a multi-state sale-leaseback, and the rules governing them vary significantly from state to state. Careful structuring at the outset of a transaction can yield meaningful savings, but getting the structure wrong — or overlooking a state-specific rule — can result in an unexpected and substantial tax liability. Below, we highlight key considerations in three states where transfer tax and property tax issues frequently arise in sale-leaseback deals.

In Ohio, parties frequently employ "drop and swap" structures to reduce or eliminate transfer taxes. In a drop-and-swap, the seller contributes the property to a special purpose entity prior to the sale, and the buyer then acquires the ownership interests in that entity rather than the real property itself. Because Ohio's real estate transfer tax generally applies to conveyances of real property rather than transfers of entity interests, this structure can result in meaningful tax savings.

In Pennsylvania, the length of the leaseback term is a critical variable. Pennsylvania law treats a lease with a term — including renewal options — that is 30 years or longer as a taxable transfer of real property for purposes of the state's realty transfer tax. Parties structuring a sale-leaseback in Pennsylvania must therefore carefully calibrate the initial lease term and any renewal or extension options to avoid inadvertently triggering an additional layer of transfer tax on the leaseback itself.

California raises analogous concerns on the property tax side. Under California's change-in-ownership rules, certain long-term leases — generally those with original terms of 35 years or more, including reasonably certain renewal options — can trigger a reassessment of the property's value for property tax purposes. A reassessment to current fair market value can dramatically increase the annual property tax burden, particularly for properties that have been held for a long period under Proposition 13 protections. Lease terms in California sale-leasebacks should therefore be structured with these reassessment thresholds squarely in mind.

Transfer tax planning is not a one-size-fits-all exercise. The interplay between deal structure, lease terms, and state-specific tax rules makes early engagement with counsel who understand the nuances of each relevant jurisdiction essential to optimizing transaction economics.