The opinion
107 T.C. No. 7
UNITED STATES TAX COURT
REPUBLIC PLAZA PROPERTIES PARTNERSHIP, PFI REPUBLIC
LIMITED, INC., TAX MATTERS PARTNER, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 23300-94. Filed September 16, 1996.
Company A (A) sold Company B (B) a 35-percent
interest, and retained a 65-percent interest, in a
commercial office building (building) that was subject
to an existing loan (loan) made by Company C (Lender).
A and B contributed their respective interests in the
building to Partnership P (P) that was formed by A and
B pursuant to a partnership agreement (partnership
agreement), and P assumed the loan. Pursuant to a
lease, P leased A the building, which was approximately
29 percent vacant, for a term of 24 years and 11.5
months. Except for a small amount of space, A was not
to occupy the building, but instead was to sublease it.
The lease required A to pay P rent in the amounts and
on the dates specified in a schedule contained in the
lease (rent payment schedule) that took into account,
inter alia, the requirements of Lender with respect to
servicing the loan. The lease and the rent payment
schedule allocated the rental payments for the entire
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lease term, providing that the amount of rent to be
paid by A for the first 11.5 months of the lease term
was zero (11.5-month period of zero rent) and spec-
ifying the amounts and due dates of the rent to be paid
by A over the 24 years of the lease term following that
11.5-month period. The agreement under which A sold B
a 35-percent interest in the building required, inter
alia, that P deliver to Lender a letter of credit
naming Lender as beneficiary (Lender letter of credit)
in order to secure P's obligations under the loan and
that A deliver to P a letter of credit naming P as
beneficiary (P letter of credit) in order to secure P's
obligations under the Lender letter of credit. In
order to service the loan during the 11.5-month period
of zero rent, A and B agreed in the partnership agree-
ment to make additional capital contributions to P on
the first day of each month during the last 11 months
of that period.
Respondent concedes that if the Court were to find
that the 11.5-month period of zero rent qualifies as a
reasonable rent holiday described in sec. 467(b)(5)(C),
I.R.C.,1 P would be entitled for 1988 to accrue rent
under the lease pursuant to the terms of the lease
(respondent's concession).
Held: The 11.5-month period of zero rent quali-
fies as a reasonable rent holiday described in sec.
467(b)(5)(C). Accordingly, pursuant to respondent's
concession, P shall accrue rent for 1988 in accordance
with the lease as provided in sec. 467(b)(1)(A).
Held, further: The lease did not allocate rent to
the 11.5-month period of zero rent in an amount equal
to the P letter of credit, and P is not required for
1988 to accrue as rent the amount of that letter of
credit.
Clark Reed Nichols and Cheryl A. Chevis, for petitioner.
Gerald W. Douglas, for respondent.
1
All section references are to the Internal Revenue Code (Code)
in effect for 1988. All Rule references are to the Tax Court
Rules of Practice and Procedure.
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CHIECHI, Judge: In the notice of final partnership adminis-
trative adjustment (FPAA), respondent determined adjustments to
the Form 1065 (Federal partnership return) that Republic Plaza
Properties Partnership (Partnership) filed for 1988.
The issues remaining for decision are:
(1) Is the 11.5-month period of zero rent at the beginning
of the lease (lease agreement) of an office building by Partner-
ship to BCE Development Properties, Inc. (BCE) a reasonable rent
holiday described in section 467(b)(5)(C)? We hold that it is.
(2) Did the lease agreement provide that the amount of a
letter of credit (viz, $8,872,245), which at the request of BCE
was issued in favor of Partnership, is rent that is allocated to
the first 11.5 months of that agreement so that Partnership is
required for 1988 to accrue as rent the amount of that letter of
credit? We hold that the lease agreement does not so provide and
that Partnership is not required to accrue that amount as rent
for 1988.
FINDINGS OF FACT
Some of the facts have been stipulated and are so found.
PFI Republic Limited, Inc. (PFI) is the tax matters partner
for Partnership. At the time the petition was filed, Partner-
ship's principal place of business was in Portland, Oregon.
In 1987, Commercial Union Capital Corporation (Commercial
Union), an investment banker employed by BCE, approached PFI
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concerning PFI's interest in investing in a sale-leaseback trans-
action involving a 56-story office building located in the
central business district of Denver, Colorado, that was known and
is herein referred to as Republic Plaza. During all relevant
periods, PFI and BCE were unrelated companies that, prior to
1987, had no business dealings with each other. The investment
that Commercial Union initially proposed to PFI involved a lease
of Republic Plaza to BCE for a period of 26 to 28 years, which
was to include a rent holiday2 of approximately 1 year that was
to occur at the beginning of the lease term.
During the course of its investigation of the investment
proposed by Commercial Union, PFI employed Marshall and Stevens
Incorporated (Marshall and Stevens) to prepare an appraisal
report (Marshall and Stevens appraisal report). Merle E. Atkins
(Mr. Atkins) and John H. Whitcomb (Mr. Whitcomb), who are quali-
fied as experts in the area of real estate appraisal, prepared
that report. PFI relied on the Marshall and Stevens appraisal
report in evaluating its proposed investment in Republic Plaza,
including, inter alia, the reasonableness of the rent holiday
included as part of that investment.
On June 14, 1988, Partnership was formed pursuant to a
partnership agreement entered into between BCE and PFI (partner-
2
As used herein, the term "rent holiday" means a period of zero
or reduced rent occurring at the beginning of a lease.
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ship agreement). During all relevant periods, Partnership, a
general partnership governed by the laws of Colorado, maintained
its books and records and filed its Forms 1065 on a calendar year
basis using the accrual method of accounting.
In connection with the formation of Partnership, a series of
interrelated events occurred. Contemporaneous with the formation
of Partnership, on June 14, 1988, pursuant to a written purchase
agreement (purchase agreement), PFI purchased an undivided 35-
percent interest in Republic Plaza from BCE, whereupon BCE owned
a 65-percent undivided interest therein.
Immediately thereafter, also on June 14, 1988, PFI and BCE
contributed their respective interests in Republic Plaza to
Partnership. Partnership took ownership of Republic Plaza
subject to a promissory note, dated April 30, 1986, that obli-
gated BCE to pay $200 million to Teachers Insurance and Annuity
Association (TIAA). Pursuant to an agreement between TIAA and
Partnership that was entered into as of June 14, 1988, that note
was restructured. Effective June 17, 1988, as restructured,
Partnership became the obligor under the promissory note issued
to TIAA (TIAA term loan), the outstanding principal balance of
that note was reduced to $177,766,184, the maturity date of that
note was changed to May 1, 2011, and that note required monthly
payments of varying amounts of principal and interest over the
term of the loan until it matured on May 1, 2011.
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Pursuant to the lease agreement dated June 14, 1988, Part-
nership leased Republic Plaza to BCE for a fixed term that
commenced on June 17, 1988, and ends at midnight on June 1, 2013
(lease term), unless extended at the option of BCE, the lessee.
At the time Partnership and BCE entered into the lease agreement,
tenants occupied approximately 71 percent of Republic Plaza
pursuant to existing leases, and approximately 29 percent of that
office building was vacant. Pursuant to the lease agreement, BCE
became the sublessor with respect to those existing tenants and
was given the right to receive rent from them.
In order to satisfy the requirements of TIAA, the mortgagor
of Republic Plaza, the lease agreement required monthly payments
of rent that were to (1) start on July 1, 1989, and terminate on
May 1, 2011, (2) be at least equal to the amounts required to pay
the monthly debt service on the TIAA term loan, and (3) be used
first to satisfy Partnership's obligations under that loan.
Starting on June 1, 2011, after the TIAA term loan was to have
been paid in full, the lease agreement required an annual payment
of rent for each of the last 2 years of the lease term. In order
to service the TIAA term loan during the initial lease period of
approximately 11.5 months that began on June 17, 1988, and ended
on May 31, 1989, during which the rent to be paid according to
the lease agreement was zero (11.5-month period of zero rent),
BCE and PFI agreed in the partnership agreement to make total
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additional capital contributions to Partnership on the first day
of each month during the period July 1, 1988, through June 1,
1989, in the amount of approximately $1,759,144.
The amounts and due dates of rent payable under the lease
agreement that were not required by TIAA in order to service the
TIAA term loan were developed through the use of a computer
program that took into consideration certain requirements of the
lessor and the lessee. Those requirements included (1) creating
a schedule for the payment of rent that took account of projected
increases in rent in the Denver market for office space (Denver
office market) and that not only provided a certain yield for the
lessor and its partners3 but also minimized the cost to the
lessee and (2) structuring the total amount of rent to be paid
during each of the 24-annual lease periods that start on June 1
and end on May 31 (annual lease period) following the 11.5-month
period of zero rent (including the amount of rent to be paid
monthly to service the TIAA term loan) so that such total amount
during each such period was always within 90 percent to 110
percent of the average annual amount of the aggregate rent that
3
PFI entered into the sale-leaseback transaction involving Re-
public Plaza in order to make a profit. At the time PFI was de-
termining the profit that it expected to realize from that trans-
action, it anticipated that it would (1) pay Federal and State
income taxes at the highest marginal rate throughout the lease
term, (2) realize $205 million of pretax profit, and (3) pay in
the aggregate approximately $75 million in income taxes over the
lease term.
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was to be paid over those 24 years of the lease term.
Taking into account the foregoing considerations involving
the requirements of the TIAA term loan, Partnership, PFI, and
BCE, the lease agreement contained the following provisions with
respect to the amounts and due dates of the rent to be paid under
that agreement. It required BCE to pay Partnership "net basic
rent" (basic rent) in arrears on each installment date throughout
the lease term "in an amount equal to the sum of the Basic Rent
Portions for all Partners."4 Schedule E of the lease agreement
set forth a schedule (rent payment schedule) that allocated the
basic rent to be paid by BCE for the entire lease term, providing
the amounts of basic rent to be paid and the due dates for the
payment of such rent. Pursuant to the lease agreement and the
rent payment schedule, (1) for the initial lease period of
approximately 11.5 months that began on June 17, 1988, and ended
on May 31, 1989, the amount of basic rent to be paid by BCE was
zero; and (2) for each of the 24-annual lease periods thereafter
4
The lease agreement provided that "For any Installment Date,
the 'Basic Rent Portion' for any Partner shall mean the product
of (i) said Partner's percentage interest in the Lessor as speci-
fied on Schedule E, times (ii) the percent figure for such Part-
ner set forth opposite said Installment Date, times (iii) Les-
sor's Cost as specified on Schedule E." The lease agreement
defined the term "installment date" for purposes of the payment
of the basic rent to mean July 1, 1989, and the first day of each
month thereafter throughout the lease term. For all other
purposes, the lease agreement defined that term to mean July 1,
1988, and the first day of each month thereafter during the lease
term.
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that start on June 1 and end on May 31, the total amount of basic
rent to be paid by BCE was as follows:5
Total Amount of
Annual Lease Period Basic Rental Payments
June 1, 1989, through May 31, 1990 $27,185,083.85
June 1, 1990, through May 31, 1991 27,185,083.85
June 1, 1991, through May 31, 1992 27,185,083.85
June 1, 1992, through May 31, 1993 27,185,083.85
June 1, 1993, through May 31, 1994 27,185,083.85
June 1, 1994, through May 31, 1995 27,185,083.85
June 1, 1995, through May 31, 1996 27,185,083.85
June 1, 1996, through May 31, 1997 27,185,083.85
June 1, 1997, through May 31, 1998 27,185,083.85
June 1, 1998, through May 31, 1999 27,185,083.85
June 1, 1999, through May 31, 2000 27,185,083.85
June 1, 2000, through May 31, 2001 33,226,213.70
June 1, 2001, through May 31, 2002 33,226,213.70
June 1, 2002, through May 31, 2003 33,226,213.70
June 1, 2003, through May 31, 2004 33,226,213.70
June 1, 2004, through May 31, 2005 33,226,213.70
June 1, 2005, through May 31, 2006 33,226,213.70
June 1, 2006, through May 31, 2007 33,226,213.70
June 1, 2007, through May 31, 2008 33,226,213.70
June 1, 2008, through May 31, 2009 33,226,213.70
June 1, 2009, through May 31, 2010 33,226,213.70
June 1, 2010, through May 31, 2011 33,226,213.70
June 1, 2011, through May 31, 2012 33,226,213.70
June 1, 2012, through May 31, 2013 27,185,083.85
For each of the 22-annual lease periods immediately follow-
ing the 11.5-month period of zero rent, the rent payment schedule
5
One of petitioner's exhibits that purported to show that the
rent payment schedule complied with the standards established by
Rev. Proc. 75-21, 1975-1 C.B. 715, indicated that the total
amount of basic rent to be paid for each of the 24-annual lease
periods following the 11.5-month period of zero rent was slightly
greater than the total amount of basic rent to be paid for each
such period that we have calculated in accordance with Schedule
E. Although it is unclear from the record why these minimal
discrepancies exist, they do not affect our findings or conclu-
sions herein.
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required monthly payments on the first day of each month of the
amount of basic rent specified in that schedule. For each of
those periods, the rent payment schedule required a monthly
payment on February 1 of the basic rent specified in that sched-
ule that was significantly larger than the monthly payments
required on the first day of the other 11 months of each such
period.6 For each of the last two annual lease periods of the
lease term, the rent payment schedule required an annual payment
6
For most of the 22-annual lease periods immediately following
the 11.5-month period of zero rent, the rent payment schedule
required equal monthly payments of the basic rent specified in
that schedule for all months throughout each such period except
February. To illustrate, for the annual lease period that began
on June 1, 1989, and ended on May 31, 1990, the lessee was
required to remit the basic rent for that period, payable in
arrears, by paying (1) $1,761,894.98 on July 1, 1989, and on the
first day of each month thereafter except February and
(2) $7,804,239.91 on Feb. 1, 1990. However, for each of certain
of those 22-annual lease periods (viz, those annual lease periods
during which the monthly payments due under the TIAA term loan
were to change pursuant to the terms of that loan), the rent
payment schedule required for each such lease period (1) equal
monthly payments of the basic rent specified therein on July 1
and on the first day of each month thereafter through January,
(2) a monthly payment of basic rent in a significantly larger
amount on February 1, and (3) equal monthly payments of the basic
rent specified therein on March 1 and on the first day of each
month thereafter through June. The monthly payments due under
the TIAA term loan were to change as of Feb. 1, 1993, Feb. 1,
1998, and Mar. 1, 2003, and, consequently, the monthly payments
of the basic rent specified in the rent payment schedule were to
change as of those dates. To illustrate, for the annual lease
period that began on June 1, 1992, and ended on May 31, 1993, the
lessee was required to remit the basic rent for that period,
payable in arrears, by paying (1) $1,761,894.98 on July 1, 1992,
and on the first day of each month thereafter through Jan. 1,
1993, (2) $7,689,721.21 on Feb. 1, 1993, and (3) $1,790,524.66 on
Mar. 1, 1993, and on the first day of each month thereafter
through June 1, 1993.
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on February 1 of the basic rent specified in that schedule for
each such period.
Pursuant to the rent payment schedule in the lease agree-
ment, the total amount of basic rental payments specified in that
schedule (1) remained constant at $27,185,083.85 for each of the
11-annual lease periods immediately following the 11.5-month
period of zero rent, (2) increased to $33,226,213.70 for each of
the succeeding 12-annual lease periods, and (3) returned to
$27,185,083.85 for the final annual lease period. The total rent
to be paid during each of the 24-annual lease periods following
the 11.5-month period of zero rent was not greater than 10
percent above or 10 percent below the average annual amount of
the aggregate basic rent that was to be paid over those 24 years
of the lease term.
On June 17, 1988, BCE, as lessee under the lease agreement,
began immediate economic use of Republic Plaza. Except for a
relatively small amount of space used by BCE for its operations
as sublessor of Republic Plaza, at no time during any relevant
period did BCE occupy the space it leased in that building under
the lease agreement. BCE, as lessee, was required to pay the
basic rent in the amounts and on the dates specified in the lease
agreement and the rent payment schedule. BCE, and not Partner-
ship, assumed the risk of subleasing the approximately 29 percent
of Republic Plaza that was vacant at the time Partnership and BCE
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entered in that agreement as well as any space that became vacant
when existing leases expired or tenants defaulted under their
leases.
The Marshall and Stevens appraisal report on which PFI
relied in evaluating, inter alia, the reasonableness of the 11.5-
month period of zero rent provided by the lease agreement con-
tained discussions of various matters, including the condition of
the Denver office market at the time the lease agreement was
executed, the practice in that market of granting rent holidays
and other lease concessions in order to attract lessees, and
specific situations in that market in which the lessors of
commercial office buildings had granted periods of free rent and
other lease concessions to lessees. At the time Partnership and
BCE entered into the lease agreement, Partnership and its part-
ners PFI and BCE were aware of, inter alia, those matters.
At the time the lease agreement was executed in June 1988,
the Denver office market was suffering the aftereffects of
overbuilding that occurred during the late 1970's and early
1980's. Consequently, at that time, the Denver office market was
experiencing high vacancy rates of approximately 27 percent, and,
in order to attract lessees, lessors were offering prospective
lessees various types of concessions and low rental rates. Prior
to the execution of the lease agreement in June 1988, the lessor
under the existing leases for space in Republic Plaza had typi-
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cally granted periods of free rent as concessions to lessees. At
the time the lease agreement was executed, the inclusion of such
rent holidays in commercial leases like the lease agreement
involved here was one type of concession offered by lessors that
was a reasonable and acceptable practice in the Denver office
market (and throughout the commercial real estate industry),
irrespective of whether the lessees under such leases intended to
occupy the leased space or to sublease it to others. Although
Marshall and Stevens expected the practice of including rent
holidays in commercial leases to continue for a few years after
June 1988, it anticipated that the Denver office market would
tighten during those years, with the result that rental rates
would increase, vacancy rates would decrease, and fewer lease
concessions would be granted to lessees by lessors.
At the time Partnership and BCE entered into the lease
agreement, it was a reasonable and acceptable practice throughout
the commercial real estate industry, including the Denver office
market, to offer rent holidays in long-term commercial leases
such as the lease agreement involved here in order to induce the
lessee/sublessor to agree to assume the risk of subleasing the
unleased, vacant space to others.7 Specifically, in June 1988,
when the lease agreement was executed, it was consistent with
7
The typical periods of free rent being offered in the Denver
office market at the time the lease agreement was executed were 6
months on 5-year leases and 12 months on 10-year leases.
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reasonable and acceptable practice throughout the commercial real
estate industry, including the Denver office market, for the
lease agreement to grant an 11.5-month period of zero rent, since
under that agreement BCE was to sublease, rather than occupy,
virtually all of Republic Plaza for about 25 years, and it
thereby assumed the risk of subleasing the approximately 29
percent of unleased, unoccupied space in that building.8
In order to secure payment on the TIAA term loan, the
purchase agreement contained certain provisions required by TIAA.
Specifically, as of the time of its closing on June 17, 1988, the
purchase agreement obligated (1) Partnership, the obligor under
the TIAA term loan and the lessor under the lease agreement, to
deliver to TIAA an irrevocable standby letter of credit initially
in the amount of $8,872,245 (TIAA letter of credit) that was to
be issued by the Canadian Imperial Bank of Commerce (CIBC) and
that was to name TIAA as beneficiary in order to secure Partner-
ship's obligations under that loan; (2) BCE, the seller of an
undivided 35-percent interest in Republic Plaza and the lessee
under the lease agreement, to deliver to Partnership an irrevoca-
8
BCE's risk under the lease agreement included its incurring
expenses in order to attract tenants, such as providing improve-
ments to the unleased, vacant space in Republic Plaza and grant-
ing rent holidays at the inception of subleases. The 11.5-month
period of zero rent granted to BCE by the lease agreement en-
hanced the ability of BCE, as sublessor, to grant rent holidays
that were consistent with commercial practice in the Denver
office market to prospective lessees of space in Republic Plaza.
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ble standby letter of credit initially in the amount of
$8,872,245 (Partnership letter of credit) that was to be issued
by CIBC and that was to name Partnership as beneficiary in order
to secure Partnership's obligations under the TIAA letter of
credit; and (3) Partnership, the obligor under the TIAA term loan
and the lessor under the lease agreement, to assign collaterally
the Partnership letter of credit to CIBC. During the 11.5-month
period of zero rent, the TIAA letter of credit and the Partner-
ship letter of credit were intended to secure the obligation of
BCE and/or of PFI, the partners of Partnership, to make addi-
tional capital contributions to Partnership during that period as
required by the partnership agreement in order to service the
TIAA term loan.
As required by the purchase agreement, as of the time of its
closing, (1) Partnership delivered to TIAA the TIAA letter of
credit that was issued by CIBC, effective June 15, 1988, in an
amount not exceeding $8,872,245 and that named TIAA as benefi-
ciary;9 (2) BCE delivered to Partnership the Partnership letter
of credit that was issued by CIBC, effective June 15, 1988, in
the amount of $8,872,245 and that named Partnership as benefi-
9
The TIAA letter of credit that Partnership delivered to TIAA
expired on Mar. 1, 1989, and was deemed automatically extended
without amendment for 1 year from that or any future expiration
date until no later than June 30, 1991 (unless CIBC notified TIAA
and Partnership at least 40 days prior to any such expiration
date that it decided not to extend the TIAA letter of credit).
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ciary;10 and (3) Partnership collaterally assigned the Partner-
ship letter of credit to CIBC.
The lease agreement recited that BCE, as lessee of Republic
Plaza, "has delivered" the Partnership letter of credit with an
expiry date of June 30, 1989, in order to secure BCE's obliga-
tions under that agreement, including its obligation to remit the
basic rent in the amounts and on the dates specified in the rent
payment schedule.11 The lease agreement further recited that
Partnership could assign the Partnership letter of credit to CIBC
as collateral and that, as of June 14, 1988, Partnership had
collaterally assigned its rights in that letter of credit to
CIBC. Partnership directed BCE in the lease agreement to deliver
the Partnership letter of credit and any extension or replacement
thereof directly to CIBC to be held as collateral on behalf of
Partnership.
10
The Partnership letter of credit that BCE delivered to Part-
nership expired on Mar. 1, 1989, and was deemed automatically
extended without amendment for 1 year from that or any future
expiration date until no later than June 30, 1991 (unless CIBC
notified Partnership and BCE at least 50 days prior to any such
expiration date that it decided not to extend the Partnership
letter of credit).
11
Pursuant to the lease agreement, at least 40 days prior to
Dec. 31, 1988, Dec. 31, 1989, and Dec. 31, 1990, respectively,
BCE was required to deliver to Partnership an extension or
replacement of the Partnership letter of credit, or of any such
extension or replacement, in an amount prescribed in the lease
agreement. Each such extension or replacement was to have an
expiry date that occurred no earlier than 30 days and no later
than 60 days after Dec. 31, 1988, Dec. 31, 1989, Dec. 31, 1990,
and Apr. 30, 1991, respectively.
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In the Federal partnership return that Partnership filed for
1988, it did not accrue any rent under the lease agreement.
OPINION
Petitioner bears the burden of proving that respondent's
determinations in the FPAA are erroneous. Rule 142(a); Welch v.
Helvering, 290 U.S. 111, 115 (1933).
On brief, the parties agree that the lease agreement is a
section 467 rental agreement, as defined in section 467(d), and
that therefore Partnership is subject to section 467. Section
467 provides in pertinent part:
(b) ACCRUAL OF RENTAL PAYMENTS.--
(1) ALLOCATION FOLLOWS AGREEMENT.--Except as
provided in paragraph (2), the determination of the
amount of rent under any section 467 rental agreement
which accrues during any taxable year shall be made--
(A) by allocating rents in accordance with
the agreement, and
(B) by taking into account any rent to be
paid after the close of the period in an amount
determined under regulations which shall be based
on present value concepts.
(2) CONSTANT RENTAL ACCRUAL IN CASE OF CERTAIN TAX
AVOIDANCE TRANSACTIONS, ETC.--In the case of any sec-
tion 467 rental agreement to which this paragraph
applies, the portion of the rent which accrues during
any taxable year shall be that portion of the constant
rental amount with respect to such agreement which is
allocable to such taxable year.
(3) AGREEMENTS TO WHICH PARAGRAPH (2) APPLIES.--
Paragraph (2) applies to any rental payment agreement
if--
(A) such agreement is a disqualified
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leaseback or long-term agreement, or
(B) such agreement does not provide for the
allocation referred to in paragraph (1)(A).
(4) DISQUALIFIED LEASEBACK OR LONG-TERM
AGREEMENT.--For purposes of this subsection, the term
"disqualified leaseback or long-term agreement" means
any section 467 rental agreement if--
(A) such agreement is part of a leaseback
transaction or such agreement is for a term in
excess of 75 percent of the statutory recovery
period for the property, and
(B) a principal purpose for providing in-
creasing rents under the agreement is the avoid-
ance of tax imposed by this subtitle.
(5) EXCEPTIONS TO DISQUALIFICATION IN CERTAIN
CASES.--The Secretary shall prescribe regulations
setting forth circumstances under which agreements will
not be treated as disqualified leaseback or long-term
agreements, including circumstances relating to--
(A) changes in amounts paid determined by
reference to price indices,
(B) rents based on a fixed percentage of
lessee receipts or similar amounts,
(C) reasonable rent holidays, or
(D) changes in amounts paid to unrelated 3rd
parties.
The parties disagree over whether the lease agreement is a
disqualified leaseback or long-term agreement described in
section 467(b)(4).12 In advancing their respective positions
12
Respondent's primary position in the FPAA was that for 1988
Partnership was required to accrue rent under the lease agreement
in an amount equal to 6.5 (viz, the number of months remaining in
1988 after the execution of the lease agreement on June 14, 1988)
(continued...)
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regarding that dispute, the parties focus on the 11.5-month
period of zero rent provided in the lease agreement.
Petitioner argues that the 11.5-month period of zero rent is
a reasonable rent holiday described in section 467(b)(5)(C) and
that, accordingly, the lease agreement is not to be treated as a
disqualified leaseback or long-term agreement.
Respondent concedes in her opening brief that
If petitioner can establish that the absence of rental
income during this [11.5-month] period [of zero rent]
qualifies as a reasonable rent holiday under the Code,
then the Partnership's deferral of this income will not
be deemed primarily for tax avoidance purposes. In
such a case, the Partnership would be entitled to
report the rental income under the economic accrual
method pursuant to the terms of the lease agreement.13
12
(...continued)
times the average monthly rent payment due over the entire lease
term. On brief, respondent abandons that position and relies
solely on her alternative position in the FPAA that Partnership
must accrue rent under the lease agreement according to the
constant rental accrual method prescribed in sec. 467(b)(2)
because the lease agreement constitutes a disqualified leaseback
or long-term agreement as defined in sec. 467(b)(4).
13
We construe the above-quoted concession of respondent to be a
concession by her that increasing rents, if any, under the lease
agreement that are not attributable to the 11.5-month period of
zero rent were not provided for a principal purpose of avoiding
tax under sec. 467(b)(4)(B). Other statements by respondent that
concede this point include the following statement in her answer-
ing brief:
In addition, at pages 16-17 of its opening brief, peti-
tioner attempts to prove the nonexistence of a tax-avoid-
ance motive by emphasizing why the lease was justified in
increasing lease payments in year 12 of the lease, and
petitioner's expected increases in projected cash flows
from future subleases when the building was expected to be
(continued...)
- 20 -
However, respondent contends that the 11.5-month period of zero
rent does not qualify as a reasonable rent holiday described in
section 467(b)(5)(C).14
13
(...continued)
fully occupied. The problem with petitioner's arguments is
that they attempt to prove a non-tax avoidance motive for
periods and events that occur after the first 11.5 months
of the lease. Petitioner must justify the fact that the
nonpayment of rent during the first 11.5 months of the
lease did not have tax avoidance as its primary motive.
What happens in year 12 and petitioner's expectations for
increases in cash flows from future subleases when the
building is occupied have nothing to do with the forgive-
ness of rent during the first 11.5 months of the lease. At
least, petitioner has not established this relationship.
The key point here is the reasons given by petitioner do
not establish a business purpose or tax-independent motive
for the nonpayment of rent during the critical time period
in dispute. In essence, petitioner's explanation of future
events is just not focused on the period of time and the
issue before the Court.
14
Respondent also makes various assertions in her answering
brief about "several major distortions or unexplained spikes [on
February 1 of each of the 22-annual lease periods following the
11.5-month period of zero rent] in the rental payments over the
long term of the lease" that she alleges are provided in the
rental payment schedule and argues from those assertions that
Schedule E cannot be said to relate to the terms of the
lease agreement because of the unexplained distortions
described above. This is because the lease (Jt. Ex. 9-I,
pp. 17-18, ¶ 4.1) basically provides that annual rent is
equal to the lower of fair market rental or 90% of the
average basic rent. This latter description of rent under
the lease agreement in no way covers, explains, or relates
to the several up-and-down increases in rental payment over
the term of the lease. Therefore, since each of the rental
payments was not allocated according to the actual terms of
the lease agreement, the rent leveling and present value
principles of I.R.C. § 467(b)(2) and § 467(e) apply.
Although it is not altogether clear what respondent intends to
(continued...)
- 21 -
Respondent further asserts, apparently as an alternative
14
(...continued)
suggest in the foregoing excerpt from her answering brief,
apparently respondent believes that it supports her position
that, under the facts and circumstances presented here, not
only does the 11.5-month period of zero rent not qualify as a
reasonable rent holiday described in sec. 467(b)(5)(C), it
also was granted for a principal purpose of tax avoidance.
Although we deal below with those contentions, we note that if
respondent also is suggesting by the foregoing passage from
her answering brief that the lease agreement does not provide
for the allocation of rent referred to in sec. 467(b)(1)(A),
see sec. 467(b)(3)(B), we find any such suggestion to be
contrary to the parties' stipulation that "The Lease Agreement
sets forth as Schedule E a schedule that allocates the rental
payments for the entire lease period, providing for the amount
of the rental payments and specifying the due date for each
month." See Piccadilly Cafeterias, Inc. v. United States,
Fed. Cl. (Aug. 19, 1996).
We also note that the reasons quoted above that are relied
on by respondent for respondent's conclusion that "Schedule E
cannot be said to relate to the terms of the lease agreement"
cite provisions in the lease agreement that we do not find
relevant to that inquiry. The provisions in the lease agree-
ment on which respondent relies that require the basic rent to
be equal to the lower of fair market rental and 90 percent of
the average monthly installment of basic rent paid by the
lessee during the lease term are to apply only to each of the
first six extensions of that lease term, if any, and were not
prescribed in Schedule E. Schedule E set forth a schedule of
basic rental payments only for the lease term of the lease
agreement that started on June 17, 1988, and ends on June 1,
2013. Moreover, pursuant to the lease agreement, any exten-
sions of the lease term were to occur only at the option of
the lessee, that is to say, only if the lessee elected at the
times and on the terms prescribed in the lease agreement to
extend the lease term beyond June 1, 2013. In this connec-
tion, sec. 467(e)(6) provides that, except as provided in
regulations prescribed by the Secretary, there shall not be
taken into account in computing the term of any agreement for
purposes of sec. 467 any extension that is solely at the
option of the lessee. The Secretary has promulgated no
regulations under sec. 467(e)(6) that apply to the instant
case. See infra note 15.
- 22 -
argument, that even if the Court were to hold that the 11.5-month
period of zero rent provided in the lease agreement is a reason-
able rent holiday described in section 467(b)(5)(C) and/or was
not granted for a principal purpose of tax avoidance so that
Partnership shall accrue rent for 1988 under the lease agreement
by allocating that rent in accordance with that agreement as
provided in section 467(b)(1)(A), and not pursuant to the con-
stant rental accrual method as provided in section 467(b)(2),
Partnership nonetheless would be required for 1988 to accrue rent
under section 467(b)(1)(A) in an amount at least equal to the
amount of the Partnership letter of credit (viz, $8,872,245) that
BCE delivered to Partnership.
Reasonable Rent Holiday--Section 467(b)(5)(C)
The Code does not define what is meant by the term "reason-
able rent holidays" in section 467(b)(5)(C).15 However, the
15
Although sec. 467(b)(5) required the Secretary to issue
regulations prescribing circumstances relating to, inter alia,
reasonable rent holidays under which agreements will not be
treated as disqualified leaseback or long-term agreements, no
regulations were issued under sec. 467 until June 3, 1996. On
that date, respondent issued proposed regulations under sec. 467
that do not apply to (1) rental agreements entered into prior to
the date on which regulations under that section are published as
final regulations in the Federal Register and (2) disqualified
leaseback and long-term agreements entered into prior to June 3,
1996. Sec. 1.467-8, Proposed Income Tax Regs., 61 Fed. Reg.
27850 (June 3, 1996). Those proposed regulations, which are not
in any event binding on the Court, Zinniel v. Commissioner, 89
T.C. 357, 369 (1987), do not apply to the lease agreement in-
volved here that was entered into in June 1988, and nothing
herein is intended to convey, and nothing herein should be
(continued...)
- 23 -
legislative history of the Deficit Reduction Act of 1984, Pub. L.
98-369, sec. 92(a), 98 Stat. 494, 610, which enacted section 467
into the Code, provides guidance as to the meaning of that term.
The conference committee report (committee report) indicates in
pertinent part:
In addition, the conferees intend that the regula-
tions will provide a safe harbor for leases under which
no rent is payable (or is payable at a reduced rate)
for a reasonable period of time after the inception of
the lease. Whether the length of a "rent holiday" is
reasonable will be determined by commercial practice in
the locality where the use of the property will occur
at the time the lease is entered into. The conferees
expect that, in general, this rent holiday will not
exceed twelve months, and in no event shall exceed
twenty-four months. [H. Conf. Rept. 98-861, at 893
(1984), 1984-3 C.B. (Vol. 2) at 147.]
Respondent contends that, because the lease agreement does
not label or refer to the 11.5-month period of zero rent as a
"rent holiday", it can never qualify as a reasonable rent holiday
described in section 467(b)(5)(C). Respondent's contention is
baseless. As made clear in the committee report, the term "rent
holiday" in section 467(b)(5)(C) simply means a period after the
beginning of a lease during which either no rent is payable or
rent is payable at a reduced rate. Id. See also Staff of the
Joint Comm. on Taxation, General Explanation of the Revenue
Provisions of the Deficit Reduction Act of 1984, at 290 (J. Comm.
15
(...continued)
construed as conveying, the Court's views with respect to any
portion of those proposed regulations.
- 24 -
Print 1985). The 11.5-month period of zero rent provided in the
lease agreement fits squarely within the definition of a rent
holiday in the committee report, and it is not necessary for the
lease agreement to label it as such.
Respondent also contends that the 11.5-month period of zero
rent cannot qualify as a reasonable rent holiday described in
section 467(b)(5)(C) because at the time Partnership and BCE
entered into the lease agreement in June 1988 the inclusion of
rent holidays in commercial leases was a reasonable and accept-
able practice in the Denver office market only for commercial
leases under which the lessees occupied the leased space, and the
lease agreement was not such a lease. Rather, it was a master
lease under which BCE, albeit the lessee, was not to occupy
Republic Plaza except for a small amount of space; instead, BCE
was to sublease space in that office building to other persons
who were to occupy it.
To counter respondent's arguments and to support its posi-
tion that the 11.5-month period of zero rent qualifies as a
reasonable rent holiday described in section 467(b)(5)(C),
petitioner relies, inter alia, on the opinions of two expert
witnesses, Mr. Atkins and Mr. Whitcomb, who are qualified as
experts in real estate appraisal and who prepared the Marshall
and Stevens appraisal report.
We evaluate the opinions of experts in light of the quali-
- 25 -
fications of each expert and all other evidence in the record.
Estate of Christ v. Commissioner, 480 F.2d 171, 174 (9th Cir.
1973), affg. 54 T.C. 493 (1970); IT&S of Iowa, Inc. v. Commis-
sioner, 97 T.C. 496, 508 (1991); Parker v. Commissioner, 86 T.C.
547, 561 (1986). We have broad discretion to evaluate "'the
overall cogency of each expert's analysis.'" Sammons v. Commis-
sioner, 838 F.2d 330, 334 (9th Cir. 1988) (quoting Ebben v.
Commissioner, 783 F.2d 906, 909 (9th Cir. 1986), affg. in part
and revg. in part on another issue T.C. Memo. 1986-318. We are
not bound by the formulae and opinions proffered by an expert,
especially when they are contrary to our own judgment. Orth v.
Commissioner, 813 F.2d 837, 842 (7th Cir. 1987), affg. Lio v.
Commissioner, 85 T.C. 56 (1985); Silverman v. Commissioner, 538
F.2d 927, 933 (2d Cir. 1976), affg. T.C. Memo. 1974-285; Estate
of Kreis v. Commissioner, 227 F.2d 753, 755 (6th Cir. 1955),
affg. T.C. Memo. 1954-139. Instead, we may reach a decision
based on our own analysis of all the evidence in the record.
Silverman v. Commissioner, supra at 933. The persuasiveness of
an expert's opinion depends largely upon the disclosed facts on
which it is based. See Tripp v. Commissioner, 337 F.2d 432, 434
(7th Cir. 1964), affg. T.C. Memo. 1963-244. While we may accept
the opinion of an expert in its entirety, Buffalo Tool & Die
Manufacturing Co. v. Commissioner, 74 T.C. 441, 452 (1980), we
may be selective in the use of any portion of such an opinion.
- 26 -
Parker v. Commissioner, supra at 562. Furthermore, we may reject
the opinion of an expert witness in its entirety. See Palmer v.
Commissioner, 523 F.2d 1308, 1310 (8th Cir. 1975), affg. 62 T.C.
684 (1974); Parker v. Commissioner, supra at 562-565.
We have evaluated the Marshall and Stevens appraisal report
and the letters, opinions, and analyses of Mr. Atkins and Mr.
Whitcomb, both of whom we found credible. We found that report
and those letters, opinions, and analyses to be cogent and
persuasive, and we have relied on them in making our findings
herein.
According to Mr. Atkins, at the time the lease agreement was
signed in June 1988, lessors in the Denver office market were
typically offering 6 months of free rent on 5-year leases and 12
months of free rent on 10-year leases. In the opinion of Mr.
Atkins, the 11.5-month period of zero rent provided in the lease
agreement was consistent with reasonable and acceptable practice
in the Denver office market at the time that lease agreement was
executed.16 According to Mr. Atkins, it was a reasonable and
16
Although Mr. Atkins did not identify a situation in the
Denver office market of a rent holiday being offered in a lease
under which the lessee did not occupy the leased space, he did
identify two situations in localities outside that market in
which lessees who did not occupy the leased spaced received rent
holidays and discussed, but did not identify because of con-
straints imposed on him regarding their confidentiality, certain
other situations of which he was aware in which lessees received
rent holidays and did not occupy the leased space. According to
Mr. Atkins, those situations about which he testified were
(continued...)
- 27 -
acceptable practice throughout the commercial real estate indus-
try, including in the Denver office market, for Partnership to
provide an 11.5-month period of zero rent in the lease agreement
in order to induce the lessee, BCE, to sign the lease agreement
which covered approximately 25 years and under which BCE, and not
Partnership, assumed the risk of subleasing the building at a
time when about 29 percent of it was vacant.17
16
(...continued)
illustrative of commercial practice in the Denver office market
at the time Partnership and BCE entered into the lease agreement.
In Mr. Atkins' opinion, at the time the lease agreement was
executed, granting rent holidays like the 11.5-month period of
zero rent provided in the lease agreement to lessees who did not
occupy the leased space was a reasonable and acceptable practice
in the Denver office market.
17
According to Mr. Atkins, a period of free rent with respect
to leased space is equivalent to having a vacancy for that period
because no rent is being paid with respect to that space. He
indicated that the average vacancy rate for leased space over the
term of a lease can be calculated by comparing the length of a
period of free rent to the total term of the lease. Thus, for
example, if a 5-year lease were to provide for 6 months of free
rent, that would be equivalent to having an average vacancy rate
of 10 percent over the term of the lease. Providing the 11.5-
month period of zero rent in the lease agreement, which covered
approximately 25 years, was equivalent to an average vacancy rate
of approximately 3.8 percent over the lease term. In the opinion
of Mr. Atkins, Partnership experienced less risk (viz, an average
vacancy rate of only 3.8 percent over the lease term) by execut-
ing the lease agreement with the 11.5-month period of zero rent
than if it had assumed and retained the risk of leasing Republic
Plaza, including the approximately 29 percent that was vacant at
the time the lease agreement was executed, to one or more lessees
who intended to occupy the building. BCE, as sublessor, assumed
the risk of leasing the approximately 29 percent of Republic
Plaza that was unoccupied when the lease agreement was executed.
That risk included its incurring expenses in order to attract
tenants, such as providing improvements to the unleased, vacant
(continued...)
- 28 -
The 11.5-month period of zero rent granted to BCE by the
lease agreement enhanced the ability of BCE, as sublessor, to
grant rent holidays that were consistent with commercial practice
in the Denver office market to prospective lessees in Republic
Plaza. In fact, prior to the execution of the lease agreement,
the lessor of Republic Plaza had granted periods of free rent as
concessions to lessees and, according to the Marshall and Stevens
appraisal report, it was expected that that practice in Republic
Plaza and in other office buildings in the Denver office market
would continue for a few years after the execution of the lease
agreement.
Mr. Whitcomb provided additional support for petitioner's
position regarding the 11.5-month period of zero rent. In a
letter he prepared with respect to a sale-leaseback transaction
involving persons unrelated to Partnership, he concluded that a
12-month rent holiday at the beginning of a 27-year lease, under
which the lessee was responsible for paying rent on the entire
leased building, was a reasonable and acceptable practice for
inducing a lessee to enter into such a lease. Mr. Whitcomb
testified that his conclusion in that letter would not have
changed if the lessee had not been planning to occupy the leased
premises, but had intended to act only as a sublessor.
17
(...continued)
space in Republic Plaza and granting rent holidays at the incep-
tion of subleases.
- 29 -
Although respondent contends that the 11.5-month period of
zero rent was inconsistent with commercial practice in the Denver
office market at the time the lease agreement was executed
because it was included as part of a master lease, she has not
established that contention as fact. Indeed, her contention is
refuted by the record herein. On that record, we have found that
providing the 11.5-month of zero rent in the lease agreement was
consistent with reasonable and acceptable practice throughout the
commercial real estate industry, including the Denver office
market, at the time the lease agreement was executed.18
To counter petitioner's contention that the 11.5-month
period of zero rent qualifies as a reasonable rent holiday
described in section 467(b)(5)(C) because it was consistent with
commercial practice in the Denver office market at the time the
lease agreement was signed, respondent contends that the commit-
tee report provides that only the determination of whether the
duration of a rent holiday is reasonable is to be determined
based on commercial practice in the locality where the property
is to be used. From that premise, respondent asserts that, even
though the length of the 11.5-month period of zero rent is, in
18
In assisting PFI in evaluating its proposed investment in
Republic Plaza, Marshall and Stevens drew no distinctions between
master leases of the type involved in this case and other types
of leases with respect to the granting of rent holidays. That
was obviously because, in their opinion, there are no such
distinctions that should be made.
- 30 -
fact, reasonable based on commercial practice in the Denver
office market, petitioner must nonetheless establish a nontax
business purpose for Partnership's granting that rent holiday in
order for it to qualify as a reasonable rent holiday described in
section 467(b)(5)(C). It is not clear to us what respondent
means by this assertion.
If it is respondent's position that petitioner must estab-
lish the commercial reasonableness in the Denver office market of
not only the duration of the rent holiday at issue, but also the
granting of, and the amount of rent reduction during, that rent
holiday, we agree. If it is respondent's position that peti-
tioner must establish a nontax business purpose for the granting,
the duration, and the amount of the rent holiday at issue other
than to conform to commercial practice in the Denver office
market at the time the lease agreement was executed, we disagree.
Any such position would be contrary to the concept of, and the
reasons for enacting, a "safe harbor" provision like section
467(b)(5)(C) and is not supported either by the language of the
safe-harbor provision in question (i.e., section 467(b)(5)(C)) or
its legislative history.
We have found on the record before us that at the time the
lease agreement was executed Partnership was aware of, inter
alia, the condition of the Denver office market and the practice
in that market of offering rent holidays and other lease conces-
- 31 -
sions to attract lessees. We have also found that at the time
Partnership and BCE entered into the lease agreement in June 1988
it was a reasonable and acceptable practice throughout the
commercial real estate industry, including the Denver office
market which generally was suffering from high vacancy rates, to
grant an 11.5-month period of free rent in commercial leases such
as the lease agreement involved here, where the lease term
covered about 25 years and the lessee assumed the risk of sub-
leasing the approximately 29 percent of unleased, vacant space in
the building.
Based on our examination of the entire record before us, we
find that the 11.5-month period of zero rent provided by the
lease agreement qualifies as a reasonable rent holiday described
in section 467(b)(5)(C). Respondent concedes that if the Court
were to so find, "Partnership would be entitled to report the
rental income under the economic accrual method pursuant to the
terms of the lease agreement."19 Accordingly, pursuant to that
concession, Partnership shall accrue rent for 1988 under the
lease agreement in accordance with that agreement as provided in
section 467(b)(1)(A).
19
In light of our finding that the 11.5-month period of zero
rent qualifies as a reasonable rent holiday described in sec.
467(b)(5)(C) and respondent's concession, we shall not consider
petitioner's additional arguments that the basic rent to be paid
by BCE under the lease agreement satisfies the guidelines of Rev.
Proc. 75-21, 1975-1 C.B. 715, and that, under the facts and
circumstances presented here, tax avoidance was not a principal
purpose for providing for increasing rents under the lease
agreement.
- 32 -
Partnership Letter of Credit
Although the parties stipulated that the lease agreement set
forth as Schedule E a schedule that allocates the rental payments
for the entire lease term, specifying the amounts and due dates
of such payments, respondent nonetheless argues that if the Court
were to hold that the 11.5-month period of zero rent is a reason-
able rent holiday described in section 467(b)(5)(C), Partnership
would be required for 1988 to accrue rent under section
467(b)(1)(A) in an amount at least equal to the amount of the
Partnership letter of credit (viz, $8,872,245) that BCE delivered
to Partnership. Because we have some difficulty in understanding
respondent's argument, we shall quote it in pertinent part:
respondent asserts that the lease allocates at least
$8,872,245.00 to the first 11.5 months of the lease by
providing for a letter of credit. The letter of credit
was delivered by the lessee, BCE, to the petitioner,
dated June 15, 1988, in the amount of $8,872,245.00.
(Stip. ¶ 26, Jt. Ex. 7-G), and the lease agreement
itself [sic]. (Jt. Ex. 9-I).
Pursuant to the specific provisions of the lease
agreement * * * the lessee is specifically required to
deliver a letter of credit to secure payment of the
basic rent under the lease in the event the lessee de-
faults on its lease payments. Furthermore, the time
period covered by this letter of credit is from June
15, 1988, the date the lessee delivered the letter of
credit to the petitioner * * * until June 30, 1989.
* * *. Not coincidentally, the time period covered by
the letter of credit equates to the 11.5-month rent
holiday claimed by the petitioner.
Clearly, by its very terms, the existence of the
letter of credit indicates that rent is not forgiven in
the first year of the lease in the event the lessee
defaults. Under the lease, the letter of credit se-
- 33 -
cures the payment of rent during the first 11.5 months
of the lease in the amount of $8,872,245.00. It is
incongruous for petitioner to argue that zero rent is
allocated to the first 11.5 months of the lease when
the letter of credit is clearly a provided-for substi-
tute in the form of security for any rent that is not
paid during this period in the amount of $8,872,245.00.
Therefore, under the terms of the lease agreement, at
least $8,872,245.00 is allocated to the lease term and
must be accrued by petitioner in the first 11.5 months
of the lease, if the Court finds that the parties to
the lease should have followed the allocations made
under the lease under I.R.C. § 467(b)(1)(A).
In addition to being difficult to comprehend, the foregoing
argument of respondent regarding the Partnership letter of credit
is premised upon certain allegations of fact that are not estab-
lished by the record herein. In this regard, it will be helpful
to quote pertinent portions of the lease agreement. That agree-
ment recited:
53. LETTER OF CREDIT. As security for the payment of
Basic Rent, Lessee has delivered a letter of credit
(herein, such letter of credit, and each extension or
replacement thereof pursuant to this Section 53, is
called the "Letter of Credit") in the aggregate amount
equal to $8,872,245, with an expiry date of June 30,
1989, issued by Canadian Imperial Bank of Commerce
("CIBC") and Citicorp Real Estate, Inc., and with the
Lessor * * * as beneficiary, which Letter of Credit may
be assigned for collateral purposes by the Lessor to
Canadian Imperial Bank of Commerce * * *.
In addition to the foregoing, at least forty (40)
days prior to the expiration of the first, second and
third Lease Years (hereinafter defined), except to the
extent that any prior Letter of Credit shall have been
drawn up, Lessee shall likewise deliver to the benefi-
ciary [Partnership] an extension of or replacement for
the Letter of Credit in an aggregate amount * * * equal
to the following * * *.
* * * * * * *
- 34 -
Lessor has collaterally assigned its rights in the
Letter of Credit * * * under this Section 53 to Cana-
dian Imperial Bank of Commerce and in accordance with
such collateral assignment, Lessor hereby directs
Lessee: to deliver the initial Letter of Credit and
any extension thereof or replacement therefor directly
to Canadian Imperial Bank of Commerce to be held as
collateral by such Bank on Lessor's behalf with a copy
thereof to Lessor.
Respondent alleges that specific provisions of the lease
agreement required BCE to deliver to Partnership the Partnership
letter of credit that was effective on June 15, 1988. It is the
purchase agreement, and not the lease agreement, that required
BCE to deliver that letter of credit to Partnership, although the
lease agreement contemplated that such letter of credit had been
delivered.20
As required by TIAA, the purchase agreement required that,
as of the closing of that agreement, (1) Partnership deliver to
20
As a further illustration of certain inaccurate factual
allegations made by respondent in advancing her position with
respect to the Partnership letter of credit, we note that,
contrary to respondent's assertion that "the time period covered
by the [Partnership] letter of credit equates to the 11.5-month
rent holiday claimed by the petitioner", the initial Partnership
letter of credit was issued effective June 15, 1988, and had an
expiry date of Mar. 1, 1989. Even if that letter of credit had
had the expiry date of June 30, 1989, that was recited in the
lease agreement quoted above, the period covered by it would not,
contrary to respondent's assertion, "equate * * * to the 11.5-
month rent holiday claimed by the petitioner", since that period
of zero rent began on June 17, 1988, and ended on May 31, 1989.
We also note that, contrary to certain recitations in the lease
agreement quoted above, the Partnership letter of credit that was
in fact delivered to Partnership and assigned to CIBC, as re-
quired by the purchase agreement, was issued only by CIBC, and
not by CIBC and Citicorp Real Estate, Inc.
- 35 -
TIAA the TIAA letter of credit for the benefit of TIAA in order
to secure payment of Partnership's obligations under the TIAA
term loan, (2) BCE deliver to Partnership the Partnership letter
of credit for the benefit of Partnership in order "to secure the
Partnership's obligations under the TIAA Letter of Credit", and
(3) Partnership collaterally assign the Partnership letter of
credit to CIBC. Although the lease agreement recited that the
Partnership letter of credit that BCE delivered to Partnership,
as required by the purchase agreement, was to serve as security
for BCE's obligations under the lease agreement, including its
obligation to pay rent, the purchase agreement is the operative
document that obligated BCE to deliver the Partnership letter of
credit to Partnership and that obligated Partnership to assign
collaterally the Partnership letter of credit to CIBC.21
21
Under the lease agreement, BCE was required to extend the
Partnership letter of credit periodically through a date not to
exceed 60 days after Apr. 30, 1991. Thus, the Partnership letter
of credit related to certain annual lease periods following the
11.5-month period of zero rent. We believe that when the lease
agreement recited that the Partnership letter of credit was
delivered as security for the payment of basic rent, it was
referring to the annual lease periods following the 11.5-month
period of zero rent that ended no later than June 30, 1991,
during which the lease agreement obligated BCE to pay monthly
prescribed amounts of basic rent, and not to the first 11.5
months of the lease term during which BCE was not obligated by
that agreement to pay any rent. We also note that, during the
11.5-month period of zero rent, the TIAA letter of credit and the
Partnership letter of credit, both of which were effective on
June 15, 1988, were intended to secure the obligation of BCE
and/or of PFI, the partners of Partnership, to make additional
capital contributions to Partnership during that period as
(continued...)
- 36 -
On the entire record before us, we find that the lease
agreement did not allocate rent to the 11.5-month period of zero
rent in an amount equal to the Partnership letter of credit (or
in any other amount) and that Partnership is not required for
1988 to accrue as rent the amount of that letter of credit.
To reflect the foregoing and the concessions of the parties,
Decision will be entered
under Rule 155.
21
(...continued)
required by the partnership agreement in order to service the
TIAA term loan.