Appellate Ruling Affirms That Commercial Tenant’s Property Improvement Costs Are Not Taxable as Rental Payments

Fern F. Musselwhite
February 16, 2012


Last spring, the case of Ruehl No. 925, LLC v. State of Florida, Dept. of Revenue received a great deal of attention in commercial real estate circles in Florida. It raised the issue of whether a tenant’s improvement costs should be taxed as if they were rental payments. Ultimately, the court in this case was not willing to equate the cost of improvements with taxable rent, and the decision was recently upheld on appeal.

The trial court found that the tenant in this case was not required to spend a specific amount of money on the improvements or complete them over a particular period of time. The court also found no evidence that the rental structure in the lease was affected by the tenant’s improvements. Rather than comparing the improvement costs to rent, the court found them to be “simply an expense which the tenant had to incur to get the premises in a condition that would be suitable for its intended purposes.”

Restaurant remodel.jpgFollowing a recent appeal, the First District Court of Appeal affirmed the trial court’s decision that the costs of the tenant’s leasehold improvements were not part of the rent due under the lease and therefore were not subject to sales tax.

If this is the final resolution of this issue, it is certainly a positive decision for landlords and tenants in Florida who are negotiating commercial leases and the costs of building out their spaces. The recession and slow pace of recovery have taken a heavy toll on the commercial real estate market in the state, and the additional taxes on the cost of tenants’ improvements and renovations would exacerbate the financial challenges facing the industry.

Our Florida real estate lawyers will continue to monitor this appellate ruling, and if there are any further developments in the case we will cover it in this blog. To ensure that you receive all of our future articles, submit your e-mail address in the subscription box at the top of the blog.