Cork Factory owners among buyers using latest loophole to lower taxes

Pittsburgh officials want to take a closer look at how certain properties, such as the Cork Factory Lofts complex in the Strip District, change hands.

Councilwoman Natalia Rudiak, chairwoman of the finance committee, said Thursday that she has asked Mayor Bill Peduto to look into the sale price of the apartment complex, which has not been made public.

Her concern, shared by Mr. Peduto and city Controller Michael Lamb, is that some buyers can avoid paying higher deed transfer taxes by purchasing properties through acquisition of holding companies, rather than the typical deed transfer that accompanies a property purchase.

The difference can have a substantial effect on how much is paid to the city, state and school district in transfer tax, city officials said.

“Neighborhoods like the Strip District are growing,” Ms. Rudiak said. “But I want to make sure we see, as a city, an economic benefit from that kind of growth.”

Mr. Lamb, who said his office has already been looking into the issue, called it an “issue of tax fairness” — if the little guy has to pay the transfer tax, so should the big guy.

The big guy, in this case, is GMH Capital Partners, headquartered near Philadelphia, which took over ownership and management of the Cork Factory complex in May. The Cork Factory apartment building opened in 2007 after a $78 million renovation, and Loft 24 opened in 2012, part of a complex that Ms. Rudiak said includes 393 apartments, 427 parking spaces and retail and commercial space.

No deed transfer was recorded, however. Therefore, no deed transfer tax, which is 4 percent on the amount paid, was due.

Instead, in May, a declaration of acquisition was filed with the state Department of Revenue that showed the acquisition of two holding companies, Big River Development LP and Cork Factory II Apartments LLC, according to the Allegheny County Department of Real Estate. That sort of transfer requires a 4 percent realty tax but only on the assessed value.

“It’s a way to perhaps pay less transfer tax than you would if you recorded a deed,” said Jeannette Hickman of the real estate department.

The declaration showed that $757,357 in realty transfer tax was paid for the parcels consisting of the two apartment complexes, assessed at about $19 million. Another $64,836 in realty tax was paid on the parking facility, assessed at $1.6 million.

Mr. Lamb said he believes the sale price for the entire complex was “north of $100 million.” But the city won’t see a deed transfer tax paid for that amount because GMH had to pay the transfer tax only on the assessed value of the parcels because of the way the company acquired the property.

Officials of GMH could not be reached for comment.

The question of whether major real estate sales are being made to avoid the typical transfer tax payment is not a new one in Pittsburgh.

“There’s a long history of developers using every means possible to avoid taxes,” said Ira Weiss, solicitor for Pittsburgh Public Schools.

Two years ago, the Pittsburgh Post-Gazette reported on instances of large property sales occurring in Pittsburgh without any deed transfer tax being paid. In one case, New York-based KKR & Co. LP acquired the North Side’s Del Monte Center for an estimated $52 million.

The so-called “89-11” transaction occurred when a buyer purchased 89 percent of the interest in a company that owned a property, rather than purchasing it outright. Three years later, the buyer could purchase the remaining share. Real estate sales only incurred the deed transfer tax if 90 percent or more of the interest was transferred within three years.

A change to state law put a stop to those types of transactions, starting in 2013, by requiring the tax to be paid if it is clear that more than 90 percent of the interest will be transferred after three years.

Mr. Peduto told reporters it may be necessary to return to Harrisburg about this issue, too.

“We closed the one loophole,” Mr. Peduto told reporters Thursday. “It may be that there’s another loophole.”

For now, Mr. Lamb said he has asked the city’s Urban Redevelopment Authority for information about what public funding supported the Cork Factory complex as part of a review of the project.

A spokeswoman for the URA said the projects had benefited from public funding, including $750,000 from the state for the parking garage, $2.15 million for the Lot 24 project and a $1 million Pittsburgh Development Fund loan for the Lot 24 project from the URA, which has been repaid.