Last week, the New Hampshire Supreme Court decided an interesting case concerning the applicability of the New Hampshire real estate transfer tax to related party transfers. In Say Pease IV, LLC v. New Hampshire Department of Revenue Administration, the New Hampshire Supreme Court found that the transfer of the membership interests in a limited liability company which owned 47.5% of the membership interests in a real estate holding company to another LLC having the same owners as the transferor entity was NOT taxable on the facts of that case. This result is somewhat unexpected in light of a 2010 NH Supreme Court decision which had held that related party real estate transfers qualified as “bargained for exchanges” and were therefore taxable. See First Berkshire Business Trust v. New Hampshire Department of Revenue Administration.

The Say Pease IV case involved a real estate holding company with several members, each of which was a limited liability company. The real estate holding company was seeking a mortgage loan, and its lender required that the borrower and all of its members be single-purpose, bankruptcy remote entities. One of the members in the holding company (Say Pease) owned other properties and, therefore, did not qualify as a bankruptcy remote entity. Say Pease transferred its membership interests to a new entity (Say Pease IV) which qualified as a bankruptcy remote entity. After the transfer, the membership interests in Say Pease IV were the same as the membership interests in Say Pease, and Say Pease IV owned a 47.5% interest in the holding company as had Say Pease.

The New Hampshire Department of Revenue Administration asserted the transfer was taxable as a “contractual transfer,” which is defined as a “bargained for exchange of all transfers of real estate and interests therein” (RSA c. 78-B:1-a, II). Transfers of interest in real estate holding companies are presumptively taxable under New Hampshire’s Transfer Tax Statute (RSA c. 78-B:1-a, II). The phrase “bargained for exchange” is not statutorily defined, but the NH Supreme Court has held that a “bargained for exchange” is an element of “consideration,” which is the “exchange of money, or other property and services valued in money for an interest in real estate” (First Berkshire Business Trust). The Court had also held that, although consideration requires something be given for the real estate interest transferred, parties to a transfer need not exchange adequate value and that true arms-length bargaining is unnecessary for a transaction to qualify as a bargained for exchange (First Berkshire Business Trust).

However, in the Say Pease IV case, the New Hampshire Supreme Court found that the transferor (Say Pease) did not receive any benefit as a result of the transfer and, therefore, there was no consideration for the transfer. The Court focused on the fact that the benefit associated with the transfer was enabling the real estate holding company to obtain a new mortgage loan. The court stated that although the transfer allowed the real estate holding company to obtain the mortgage loan, the members of the transferor “received no direct benefit at all.” The Court noted that the only benefit the members of Say Pease arguably received stemmed from their post-transfer ownership of Say Pease IV, the transferee, which would indirectly benefit from the mortgage loan being made to the holding company. The Court held “We are not inclined … to permit the DRA to trace the benefits of multiple layers of ownership back to the original transferor.”

Although the full import of this decision is not yet known, there now exist planning opportunities for related party real estate transfers previously thought to be unavailable.