You don’t have as much money as either David Murdock, the billionaire who has owned the island of Lanai since 1985, or Larry Ellison, the new billionaire owner of the island in a deal scheduled to close today.
But if you’ve ever sold a home or condo in Hawaii, you probably paid more tax on that sale than the billionaire duo will pay to transfer ownership of 98% of Lanai, a deal reportedly valued at some $600 million.
Most real estate sales in Hawaii are subject to a conveyance tax based on the selling price. The tax rate is a sliding scale, going from as little as one-tenth of 1 percent of the sales price for an owner-occupied home selling under $600,000, all the way up to 1.25 percent for some sales over $10 million.
However, the transfer of ownership of some 88,000 acres on Lanai is apparently set up as a sale of corporate stock in the Murdock-controlled entities that have held title to the land, with control of the land following indirectly.
If the island had been marketed and sold as a typical real estate transaction, the state’s cut via the conveyance tax would have been about $6 million. Conveyance taxes support the Legacy Land Conservation Fund, the state’s rental housing trust fund, and the natural area reserve fund, with the balance to the state’s General Fund.
But because the deal is structured around Lanai Island Holdings LLC purchase of control of several Castle & Cooke subsidiaries which in turn owned Murdock’s Lanai assets, it appears to effectively sidestep the state conveyance tax.
The structure of the sales agreement is described in the preliminary ruling of the Public Utilities Commission made public on Monday. According to the PUC’s Interim Decision & Order 30462:
The Sale Agreement contemplates the purchase and sale of Castle & Cooke Resorts, LLC, Castle & Cooke Lanai Properties, LLC, and Lanai Institute for the Environment. The overall transaction, thus, will include the purchase and sale of all the membership interests of Castle & Cooke Resorts, LLC….
As a result of the overall purchase and sale transaction, the following entities will remain in place without any change in organizational structure: (A) Castle & Cooke Resorts, LLC, and its direct and indirect subsidiaries; (B) Castle & Cooke Lanai Properties, LLC; and (C) Lanai Institute for the Environment. Meanwhile, the ownership entity of Castle & Cooke Resorts, LLC, Castle & Cooke Lanai Properties, LLC, and Lanai Institute for the Environment, will change from Castle & Cooke, Inc. (ultimate parent entity, the David H. Murdock Revocable Trust) to Lanai Island Holdings, LLC (ultimate parent entity, the Lawrence J. Ellison Revocable Trust).^”
Rep. Isaac Choy, a Democrat who represents the Manoa-University area, said other large real estate deals have also avoided conveyance tax, including the sale of Ala Moana Center and the Victoria Ward Centers.
Choy, who is a certified public accountant and chaired the 2005 tax review commission before being elected to the House, sponsored a 2011 bill to close the loophole that allows deals like this to avoid the conveyance tax. House Bill 1180 would have recognized that “the transfer of ownership of a business entity is comparable to the sale of an interest in real property held by the entity,” and would have applied the conveyance tax “when the transfer of entity ownership is essentially equivalent to the sale of an interest in real property.” The bill passed the House, but died in the Senate.
“This isn’t brain surgery,” Choy said. “To avoid conveyance tax, you just put the land in a corporation, then you transfer the stock of the corporation.”
Choy said several other states, including Connecticut and Washington, tax the transfer of controlling interests in business entities involved in similar transactions.
“It’s a fairness thing,” Choy said. “You and I have to pay the conveyance tax. Everybody should have to do the same thing.”
* A special thanks to Kauai journalist and blogger Joan Conrow (KauaiEclectic), who called the conveyance tax issue to my attention early this morning.